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November 24, 2010

Burlington Telecom and CitiCapital Agree to Terminate $33.5 Million Lease

ImagesTalks between Burlington Telecom and CitiCapital have officially broken down, forcing the city telecom to return equipment it bought through a $33.5 million lease agreement with the financier.

In a letter filed with the Vermont Public Service Board late Tuesday night, BT's attorney, William Ellis, said the transfer of equipment shouldn't interrupt existing service, but that remains a possibility.

In mid-November talks stalled between the city and CitiCapital. The impasse ocurred when the city refused to agree to terms being offered by CitiCapital to make good on its lease.

"As a result of this impasse, Burlington and CitiCapital have agreed that the equipment lease is terminated. Now that the lease is terminated, the city will obtain replacement equipment either through a partnership or other means, which will allow CitiCapital equipment to be de-installed and returned," Mayor Bob Kiss announced via email early Wednesday.

It's unclear how much time Burlington Telecom and the city will have to un-install the equipment it bought with the borrowed funds and hand over the goods to CitiCapital. It's not yet clear how Burlington Telecom will find the money — or a new private partner — to re-install equipment in order to keep phone, television and internet services flowing to its thousands subscribers.

According to the letter to the PSB, CitiCapital has agreed to let the city return the equipment "as soon as practical."

"The city is presently researching several options," wrote Ellis to the PSB. "Those options include the purchase of replacement equipment, which would allow the CitiCapital equipment to be de-installed and returned, as well as potential partnership opportunities consistent with the city's obligation to propose a cure to the board."

The city was unable to persuade CitiCapital to restructure its lease to more closely match its revenues. Burlington Telecom missed several lease payments this year; CitiCapital dipped into a $1 million reserve fund to cover most of those costs.

"The cornerstone of these negotiations has been a plan to utilize the positive cash flow Burlington Telecom is producing from regular operations to support a lease amendment. However, CitiCapital has been unwilling to make an accommodation the city could support," Kiss said.

The two sides most recently met in Boston on November 15 where CitiCapital once again refused to write off part of its lease agreement, according to Ellis' letter.

"CitiCaptial representatives also underscored their unwillingness to set a restructuring precedent with the city of Burlington that would redound to their and the industry's detriment, if other municipalities took actions simile to Burlingtton," Ellis wrote the PSB. "CitiCapital's refusal to consider the city's proposal for restructuring the lease agreement appears also to be influenced by the belief that a 'higher authority' will somehow find the money to make the payments 'at the 11th hour' if they remain steadfast in their demand for the leased equipment to be returned."

Earlier this year, the city was in talks with the legislature about ways in which statutory language could be changed to allow the city to float a bond to help cover BT's debt. Such a bond would need voter approval. That idea, however, never became law or even a proposed piece of legislation.

CitiCapital wasn't buying any of the city's claims, or its counter-offers, according to Ellis' letter.

"The city made an interim proposal consistent with the legal restrictions on the use of city funds that included returning to the Legislature to reconsider the existing statutory restrictions. CitiCapital remained dismissive of the legal restrictions on the use of city funds and asserted that the city had an absolute obligation to make the scheduled lease payments as set forth in the lease agreement," Ellis wrote.

In other words — the city and its taxpayers are on the hook to repay the money regardless of any legal or license conditions.

Though CitiCapital agreed to let Burlington Telecom and the city to return equipment "as soon as practical" it also wants to be paid in the interim for use of the equipment. The city is trying to renegotiate that condition.

"CitiCapital did agree to an accommodation period to allow continued use of its equipment on the condition that the city made minimum monthly rental payments of $311,000 ,which is well above market rates and beyond BT's cash resources. The restructuring proposal before CitiCapital provides regular and recurring monthly payments without utilizing non-BT revenue. Moreover, it provides CitiCapital a substantial upside in a format that addresses their concern about setting an industry precedent," Ellis wrote.

In the letter, Ellis requested a status conference with the PSB to talk about the lease termination in more detail as well as potential partnership opportunities to fund the replacement equipment and to propose a "cure", or long-term solution, to the board.

Last month, the PSB found Burlington Telecom in violation of several conditions of its certificate of public good.

Despite the setback, the ever-optimistic Kiss said BT would continue to provide services to Burlingtonians.

"Burlington Telecom is an important asset of the City. As always, Burlington Telecom is committed to providing continuing service to the residents and businesses who are its customers in the city of Burlington," said Kiss.

Download a copy of Burlington Telecom's letter to the Vermont Public Service Board: Download Hudson, S ltr 11-23-10-1

The complete statement of Mayor Bob Kiss:

The City of Burlington has been in negotiations with CitiCapital to restructure its lease since early this year.  The cornerstone of these negotiations has been a plan to utilize the positive cash flow Burlington Telecom is producing from regular operations to support a lease amendment.  However, CitiCapital has been unwilling to make an accommodation the City could support.

As a result of this impasse, Burlington and CitiCapital have agreed that the equipment lease is terminated.  Now that the lease is terminated, the City will obtain replacement equipment either through a partnership or other means, which will allow CitiCapital equipment to be de-installed and returned.

The City has requested a status conference with the Vermont Public Service Board to discuss this process in more detail as well as potential partnership opportunities to fund the replacement equipment and to propose a cure to the Board. Burlington Telecom is an important asset of the City.  As always, Burlington Telecom is committed to providing continuing service to the residents and businesses who are its customers in the City of Burlington.

The idea that BT can "return" and somehow “replace” the equipment is completely ridiculous. If the management of BT actually believes this is true then that is a bad sign of disconnection-from-reality. It is time for the city council to negotiate with a 3rd party who stands ready to take over BT operations.

The money owed citi was the entirety of the startup costs for BT, which implies that all of the equipment was leased from citi. The cable, the headend stuff, the trucks, the desks, everything. The $17+m stolen from taxpayers was just to keep this turd floating a little longer.

I'm not sure how you "de-install" all of the cable.

I will be brief.
Old wise man once said"were screwed" that fits pretty well.
I again ask for the resignation of Mayor Kiss, and CAO Leopold, no progress can be made with any prospective third party with the reputation of these two at a bargaining table.

What a f-ing nightmare. How can the mayor honestly call BT 'an important asset to the city' when it is obviously just the opposite--a massive liability. Definitely prog accounting methods. (By the way i'm no conservative) It's typical prog thinking to think of the big corporation as always being in the wrong. In this case, Citicorp is actually the victim. If I did to my mortgage company what BT has done to Citicorp I would be out of the house and rightfully so. My biggest fear now is how this will affect our already insanely high city property tax rates, which affect renters as much as homeowners.

One amazing thing that the letter to the PSB reveals is that BT's only proposed solution to their problems was to try to get State law changed to allow them to further soak taxpayers. Unbelievable.

Let's see if I get this right: Citi doesn't want to accept Burlington's terms lest it set a bad precedent with other municipalities pursuing similar programs.

Question: How much did Citi get from the TARP bailout, even though we risked setting a bad precedent by encouraging irresponsible financial behavior at financial institutions?
Answer: $20 billion of taxpayer (and even Burlingtonian) money.

Question: How is Citigroup doing now that citizens, even those in Burlington, coughed up money to cover their questionable practices?
Answer: $2.2 billion in profit in just the third quarter.

Citi=Laughable. If you live in Burlington and have a mortgage or car payment through Citi, switch.

Rich, BT's "terms" were "wait to see if we can get the law changed, even though we tried once and failed." They weren't even pretending that they could come up with the money any other way. It's so obvious that no one else will loan them money to cover the debt that the possibility isn't even mentioned in any of this.

Citi did absolutely nothing wrong here. They could have pulled the plug after the first missed payment, but didn't. It's called running a business.

I wonder if BT would be able to sell bonds to the people of Burlington to cover part of the cost at below the rate they were paying Citi. That way, all of the people who want it to continue could take on the risk of the debt themselves.
Alternatively, could it be mutualized (i.e. sold to the customers in the form of a co-op)? That way the city wouldn't be on the hook, but it wouldn't have the issues of being owned by a large out-of-state corporation either? Electricity and heating fuel is already delivered to large parts of Vermont by co-op; why not telecom services in Burlington? It seems to be a good middle road between privatization and the current socialized model...

"I wonder if BT would be able to sell bonds to the people of Burlington to cover part of the cost at below the rate they were paying Citi."

No, it can't. It's forbidden by State law, the City charter and the CPG.

I don't think many, if any, BT customers would be willing to pony up the several thousand dollars each that would be required to allow BT to retain the Citi lease or buy it out, which are the only ways it could survive.

I'm not sure what Kiss thinks he's accomplishing by implying otherwise, but BT is done.

I have to think that some entity will make a deal with Citi to purchase the BT assets since they will not recoup the $33.5M by selling equipment. The fiber has to be the most valuable asset and I would think it is going to be hard to find a buyer. My guess is that some deep pocket/strong balance sheet entity (private equity?) will refinance the lease or purchase the assets to take advantage of BT's positive and routine cash flow.

I am back. First brief comment just got my engine rolling.
The Mayor now feels that it is ok to tap the retirement fund as well as the cemetery fund to gather money for the defeated Burlington Electric Bond vote on Nov. 2, claiming that this will raise revenue for these two accounts while not putting the two accounts at risk.
How could anyone possibly believe a comment by the Mayor saying something is not at risk after looking at his financial voodoo track record with BT etc.
We need to say no to our councilors if they consider this,as well as the Mayor for any of his future proposals, and we need not be dictated by the attitude of Barbara Grimes from BED who just does not understand the meaning of the word no, whether it be Electrical planning or the removal of snow from her driveway.
It is hard to say what is ruining downtown Burlington quicker. Is it drunks, vagrants and perverts on the marketplace and city hall park or is it the leadership of the Mayor who by the way seems to condone the activities of the previously listed. It may be the time to put the Mayor on the same short list as the drunks, vagrants and perverts, as his detriment to the city is growing even larger.
Sorry for the harshness of this before Thanksgiving, and I wish all including the Mayor and his family a happy Thanksgiving.
This nonsense coming from City Hall must end ASAP.
It wont happen on Thanksgiving so lets shoot for Friday when we hear the resignation announcements of the Mayor and CAO. That would be something to give thanks for.

Stop complaining about it so much. We all make mistakes that is why we are human. All everyone in Burlington does is complain.

All of you compainers act like you are s o perfect. The only perfect person is & always will be GOD & if you do not like it too bad he is the final judge we have to face when we die.

I don't see how "returning" the equipment to Citi will wipe out BT's debt to Citi. It's like returning your new car because you can't make the payments. Ya think the bank's gonna let you off the hook for the car loan just cuz you returned the car? I assumed a long time ago that Citi will end up suing Burlington for the unpaid debt and I still believe that that's exactly what's going to happen. And then the taxpayers of Burlington will be called upon to pony up to pay the debt to Citi.

All you people who live in Burlington and voted for Kiss deserve what you get. And the rest of you who will have to pony up to pay for his imbecility are innocent victims of the clueless minority who put this dunce into office under IRV.

Shut this mother-f'er down. 1-800-COMCAST.

As a BT customer from day 1 it was offered in my home, I am sickened by this travesty. Why Kiss & Leopold are still in charge after stealing 17 million unwittingly from taxpayers and running this once proud ship into the rocks (Leopold: you are singularly to blame for so much of the debacle, and evidence will surface during the post-mortem).

It also sickened me to sign up for Comcast internet this morning. My installation of Comcast will take place the week of 12/6. CitiBank: my personal "de-installation" of BT equipmment can take place anytime after that.

Finally, after blasting Bob & Leo, let me also give a shout out to City Council particularly those that lacked the courage to deal with the Admin. You had a whole year and you blew it.

Jimmy, I love your quote. I think Citi should use it in their advertising
"Citi did nothing wrong here."

But Citi did do wrong things, very bad things, and never took responsibility for it. Instead we forgave them, then lent them billions on faith to help them sort things out.

In the BT case, the Burlington progressives did wrong things to, but BT is still the best product around. For CITI to moralize about municipal irresponsibility is insulting at best, nefarious at worst. The challenge is to find a solution moving forward. Not take all of your marbles and run home.

And I think it's our right as citizens, to say to CITI: You're not welcome here. There's nothing wrong with that Jimmy, is there? It's just good business.

The bond idea proposed in the comment by CarbonPenguin is something I would do. I don't understand the sentiments of most of these comments. Having no other option than Comcast is not appealing to me. I remember the corruption at Adelphia, so I don't automatically trust a commercial entity will behave in our best interests. Perhaps I'm unfairly biased and Comcast is quite transparent and accountable. I'd like to hear thoughts on that.

Certainly it is a good thing if wrong-doing is exposed and corrected at BT and systems are put in place to prevent it from happening again. What a shame to throw out all the good things that have been built as well.

Listen folks, this is about business. Most people on this board have no clue how business works. Its about making money, plain and simple. This isn't about feelings, burlington's moronic city council, bob kiss, some people in the O.N.E, citi capital, etc. It's about money. Money rules the world and makes things happen. In this case, BT isn't making enough money, so the axe is falling and it will be shut down. If you have BT, call comcast asap and sign up so you can get the copper run to your house before the 4000 customers jump ship. Kiss and Leopold should be thrown in jail for this disaster.

Honestly, I've been nothing but happy with Comcast's service. It shouldn't be 'sickening' to sign up with them. They're now less expensive than BT, stable, and for the few tech problems I've had they've promptly sent a knowledgeable friendly rep to fix it. It's why I never considered switching to BT which would have been a gamble at best.

@Rich, Citi DIDN'T do anything wrong here. What you call their "moralizing" is just Ellis editorializing. All they've said is that if you haven't paid your debt, and you can't even tell us how you plan to rectify the situation, you can't keep the equipment that secures that debt. It couldn't be simpler.

If they did anything wrong, it was making the loan in the first place. It was a terrible loan. BT never had any hope of paying back that kind of debt.

"And I think it's our right as citizens, to say to CITI: You're not welcome here. It's just good business."

If you think boycotting a company because they fulfilled their end of a bargain and pulled out when the other side didn't - and clearly would never be able to - is just "good business," then I'm going to take a wild guess that you're not in a position to throw any business Citi's way anyway.

Bye bye, BT. So long, Burlington bond rating. And everyone kiss several thousand dollars EACH in rent/property tax goodbye, because that's what it's going to take to make up the $17+ mil.

@ Rich:

"And I think it's our right as citizens, to say to CITI: You're not welcome here. There's nothing wrong with that Jimmy, is there? It's just good business."

Huh? Are you trying to be funny in some morbid way? Isn't that kinda like me telling my mortgage company, after they've foreclosed on my house 'cuz I didn't pay my mortgage, "you're not welcome here"? I'm sure they'll be all heartbroken that I've banished them.

Um, ok, and I guess Citi says, "Well, we don't care whether you "want" us here or not, 'cuz we were leaving anyway -- WITH our equipment. AND the money you owe us.

Guess you "citizens" win that one, eh, Rich?

Jimmy you do not de-install all of the cable you pay rent to the owner of the fiber optic cable. This is not a new model of ownership phone companies lease lines all the time. Burlington is not as Bob Kiss likes to think a banana republic where he can seize the fiber as eminent domain.
Kiss has his head up his dark hole. BT is dead the city will never be able to turn it on with out negotiating with Citi.
Kiss says that BT and the equipment lease are two separate animals but this really isn't true. BT the asset was collateralize against the loan which means the subscriber list belongs to Citi to sell off as they see fit. So anyone who wanted to keep their email name or phone number without jumping through bunch of hoops would travel tothe new company.
Bob Kiss lives in a fantasy land. If your car is repossessed you do not tell all of your friends you can take them for a ride because you had just put 5 bucks in the tank.

I believe if a five year old pasted a horn in the middle of Kisses head and told him he was a unicorn Bob would march up and down main street claiming he was a unicorn. The man is a moron and that is a slap in the face to morons everywhere.

Leopold has booked the liar loan of 17 million as an assert on the city's books. Kiss claims he has balanced the budget created a surplus but Leopold admitted that when the "liar loan" was moved from the asset column to the LIABILITY column, the credit rating takes a huge dump and his balance sheet bleeds red. We are bleeding vermilions Now!

IRV = election of moron.

Kiss on VPR yesterday, it's a must-listen. The guy is downright delusional. "The city's financial position is pretty good," but he consistently dodges the question of how they're going to pay back the $17+m.

Also, apparently it's no big deal that Citi terminated the "lease" - they were just paying principal and interest on $32.5m to lease equipment that apparently will only cost $6-8m to replace. When asked who owns the cable, he simply ignores the question. The whole thing is unbelievable.

Check this out.

BT's current total debt is about $50 million: the $33 million they owe CitiLease, and the $17 million they own the Burlington taxpayers (the money Leopold stole from the cash pool).

Yeah, they'll get some credit back from CitiLease when they hand over the equipment. So, let's say they get a credit of $6-8 million. They'll STILL owe CitiLease at least $25 million on the note. Am I right? You don't get out of the debt obligation just by handing the equipment back over to the creditor, right? Just like you don't get out of your mortgage obligation by handing your house back over to the bank. You still owe what the promissory note says you owe, less the value of the returned asset.

Add to that $25 million the $17 million they owe the taxpayers, and you're at $42 million.

Then add in the $6-8 million it'll cost to REPLACE the equipment they're giving back to CitiLease and you're back up to a total debt load of about $50 million.

Is my math wrong?

That's $50 million that BT (i.e., the Burlington taxpayers) will own if the Kiss Mal-administration wants to keep the BT fiasco going.

On the other hand, if they shut down BT, they'll STILL owe about $42 million, right?

So, either $50 million to keep the thing going, or $42 million if they shut it down.

For an enterprise that is worth about $14-16 million? (That's the price that the potential suitors have offered, based on their appraisal.)

So, even if His Idiocy takes the best deal he can get -- selling BT to these suitors for $14 million, then BT will STILL owe around $28 million ($42M minus $14M).

That money's got to come from somewhere folks -- and that means the Burlington City taxpayers.

Hey, you elected him.

Steve-O your calculations missed a few key points. The 17 million has increased because Kiss's wunderkind Leopold was carrying that as an offsetting asset on the citys books. Using a debt to the cash pool allowed Leopold the fraud that our credit rating was AAA but it aint he lied fabricated a liar loan with no collateral.

Leopold fudged the debt, ergo we will be paying more for every short term loan the city has taken on and our bond rating has tanked and will tank further.

There are offsets, Leopold admitted to this legerdemain in a City Council meeting. He said if the BT loan moves from the asset to the liability column the city is screwed. Add another ten million in extra expenses.

The city has no bargaining position, Citi financial has the assets of BT not just the equipment as collateral. They will not walk away and allow Kiss to use the fiber optic cable they own.

As far as a give back when they repo I don't think we payed principal payments they were to begin in August when we began defaulting on the loan. Legal fees should eat an additional 3-4 million and we have already spent about 750k on legal fees consultants and dithering.

But lets just stay positive about BT for Bob Kiss's fantasy
that he is a competent human being.

The part that pisses me off -- and should piss off every single Vermonter -- is that this is clearly not just Burlington's foolish Prog problem. We all know that ultimately every single Vermonter, from Pownal to Canaan and Vernon to Alburgh, and every town in between, is going to pay this bill. Every single Vermonter. Burlington taxpayers will refuse a $50 million tax surcharge so the rest of the state will end up bailing Burlington out.

Only people who voted for His Cluelessness should be taxed to pay for BT, but we know that won't happen.

"Only people who voted for His Cluelessness should be taxed to pay for BT."

That's a little extreme don't you think? Of course, if we instituted that philosophy across the board, I wouldn't be on the hook for the 27% increase to the US's deficit while Bush was at the helm, right? On second thought, I'll gladly accept my percentage of repayment for the $50 million owed by BT in exchange for anyone who voted for Bush accepting repayment for the trillions of dollars owed by the US government. Sounds fair to me.

Interesting - scant mention of Kiss' recent interviews on the subject, and no mention of the criminal investigation, much less the FBI's involvement, in the lengthy "fair game" piece this week.

The reality is that Citi isn't going to separate the debt from the cable, because of the precedent it would set. If BT is sold, the debt rides with it. No version of BT can operate without the cable. Someone is going to have to start making payments to Citi if they want to use those lines. Kiss said that they could only make $40K/mo in debt payments - which translates to hundreds of years to pay off the money owed.

There, you just learned more about BT in one paragraph than in the entire Fair Game piece. It's done.

@ Bungalow Benchly:

I didn't vote for Bush either. Twice. Cuz' I knew in 2000 he was absolutely clueless. So I'd be delighted with your proposal.

But I'm guessing you voted for Kiss.

So here's the deal. You and I can both sit back while only the Bush-voters pay for his deficits. And then I'll sit back while you and the other Kiss-voters pay for his.

Off topic:

In 7D's defense in today's "Letters" section of its decision last week to run an allegedly controversial photo ad on the back cover (which by the way I didn't really have a big problem with), the editors say, "In our view, Seven Days is a reflection of the community it serves — “hot to trot” ads and all — and that’s what makes it the lively, truth-telling local weekly that it is."


"Lively"? Ok, I guess I'll go along with that.

But "truth-telling"?

Is 7D so convinced of its righteousness that you call yourselves a "truth-telling" magazine? What truth? Whose truth? Yours?

Please. 7D don't own the truth.

Steve-O, how about a compromise: in response to Kiss's actions, he loses my vote next election. Sounds pretty democratic to me.

BB, I'm pretty sure the Amiable Dunce won't be running for re-election. What do you think?

"BT has been hampered from the get-go. Barred from using taxpayer dollars by lawmakers eager to “protect” the likes of billion-dollar operations such as Adelphia and Comcast, BT turned to the private market for start-up money. There, it got all the money it needed — and more. When it ran out of private cash, and the global finance markets collapsed, it secretly dipped into the public till — illegally, as it turned out."

Shay, the above paragraph is self-contradictory.

You say BT was hampered from the get go, but then you say it got all the money it needed.

Obviously, it was NOT "hampered" by the prohibition on taxpayer funding.

Further, there were lots of reasons to prohibit BT from using taxpayer dollars besides your theory that it was solely to "protect" private cable companies from public competition. Peter Clavelle and Bob Kiss -- who gave us the gift of grossly underfunded pension liabilities -- were two very good reasons.

And, as you point out, BT didn't NEED the public dollars. It got all the money it needed from the private sector. Indeed, it got more than it needed.

Financing obviously WASN'T the problem, so your Prog-tinged comment about the Legislature's restrictions on taxpayer funding is totally irrelevant.

The problem was gross mismanagament, poor (i.e., apparently non-existent) forecasting, and, as Michelle Guite points out, "spending like a drunken sailor."

So, in retrospect, wasn't the legislature in fact clearly CORRECT in prohibiting taxpayer funding? Shouldn't we be thankful that they imposed that restriction? I am (despite the fact that Leopold later simply ignored it). Would you want the Kiss Mal-administration to be solving BT's current problems by simply dipping liberally into the public trough without end? Is there any reason to believe that the enterprise wouldn't have been just as badly mismanaged if it had been funded from the start by taxpayer dollars? No.

Please give the anti-public-funding thing a rest. It was never the problem.

As noted by the PSB in their 10/8/10 order:

"It was clearly the legislative intent to avoid having the residents of Burlington saddled with a debt resulting from a failed venture."

As Steve-O points out, characterizing the legislature as "eager to 'protect' the likes of billion-dollar operations such as Adelphia and Comcast" is utterly ridiculous.

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