Claimed Default on General Services Administration's Participation Certificates, Series A Through E

Events surrounding the claimed default on Series A through E participation certificates of the General Services Administration (GSA) are discussed. GSA obtained financing estimated at $1.656 billion for the construction of 68 projects. Financing of $697.1 million was obtained for 29 projects through the sale of certificates under four trust indentures; the first indenture, dated November, 1972, covered Series A through E for a total of $196,500,000. Under a mandatory sinking fund, a percentage of certificates was to be redeemed annually beginning November, 1976, based on the principal amount of the purchase price. An error occurred, however, in computing the mandatory redemption amount, since it was not based on the principal amount of the purchase price, but on the face amount of the certificates. The Puritan Fund, Inc., owner of $17,640,000 of certificates, notified the trustee bank and GSA that the Government failed to pay the mandatory sinking fund installment due on November, 1978, and that the credit claimed for prior purchases could not be applied against this installment. The trustee stated that failure to pay prior mandatory redemption installments was a default, in which case the entire outstanding certificates could become due and payable immediately. The Government transferred cash to amend this situation, but the trustee issued a redemption notice for $3,595,000, and the Government agreed to pay interest on this amount at 9.3 percent. Redemption would be beneficial to the certificate holders, but would cost the Government an extra $3.75 million the first year in additional interest costs on the $187,825,000 of outstanding certificates.