• Go to page :
  • 1 2
  • Text Only
Voting History
rated:
I've searched on FW and the internet, but the answers to this question are all over the place. So, what happens to a general obligation municipal bond if a city files a Chapter 9 Bankruptcy proceeding? Most of the information I have found suggests that the bondholder will eventually get their money back, but it may take a while. I know circumstances will vary, but any advice (or links to other threads discussing this that I may have missed) would be greatly appreciated.

Member Summary
Most Recent Posts
Harrisbug, PA (State Capital) is teetering on the edge of BK and has been bailed out by the state twice, I dont think a ... (more)

fadippides (Dec. 31, 2010 @ 9:56a) |

Now that you've explained it to me, I get it. As long as we vilify people, we can take their money. They steal money fro... (more)

sackoloot (Jan. 01, 2011 @ 2:07a) |

Typical - and factually wrong - statement.
Only emergency responders have an early retirement, the rest of Fed/State/Coun... (more)

neophyte (Jan. 01, 2011 @ 3:43p) |

Quick Summary is created and edited by users like you... Add FAQ's, Links and other Relevant Information by clicking the edit button in the lower right hand corner of this message.
  • Also categorized in:
Thanks for visiting FatWallet.com. Join for free to remove this ad.

Chapter 9 US Code

In summary creditors are entitled to a settlement at least as good as they might receive in the absense of a Chapter 9 settlement, but the Municipality is not required to devote substantially all of its resources to the repayment of creditors. In the absence of a Chapter 9 settelemtn, creditors of a General Obligation bond are guaranteed complete repayment "eventually" but this could take decades or longer. Under Chapter 9 a settlement might be for less than complete repayment but can happen sooner since the Municipality can void most labor contracts (including municipal pension obligations) under Chapter 9 (without any protection for labor like under Chapter 11), resulting in additional tax revenues becoming available for creditors.

In short a general obligation creditor is more likely to make a substantial recovery under Chapter 9 than under Chapter 11, but there is no guarantee of a complete recovery.

Even then is it just an eventual repayment of the principal only or does it also include making up all delinquent interest payments at the original interest rate?

Very, very generically speaking, bonds have a pretty good chance of at least principal payment, but each case is different.

I have filed 3 Chapter 9 cases for clients. The important thing to note is that state law controls these obligations. In Nebraska, for example, a bond is entitled to payment in a manner completely different from a warrant. Of course, this is just a matter of expectation pre-plan. The Plan of Adjustment will tell you what you really need to know.

It depends upon the State, each State has different rules. The above reference to Chapter 9 is for municipalities and is generally not relevant to States.

BradMajors said:   It depends upon the State, each State has different rules. The above reference to Chapter 9 is for municipalities and is generally not relevant to States.

The bonds I am referring to are city bonds, and I'm worried about the City filing Chapter 9, so it is relevant.

LaPuzza said:   Very, very generically speaking, bonds have a pretty good chance of at least principal payment, but each case is different.

I have filed 3 Chapter 9 cases for clients. The important thing to note is that state law controls these obligations. In Nebraska, for example, a bond is entitled to payment in a manner completely different from a warrant. Of course, this is just a matter of expectation pre-plan. The Plan of Adjustment will tell you what you really need to know.


Makes sense. City hasn't filed yet, so there is no plan. Have you seen any Chapter 9 plans where the bondholders were completely wiped out? I would assume not, since Chapter 9 is a restructuring tool.

ananthar said:   Chapter 9 US Code

In summary creditors are entitled to a settlement at least as good as they might receive in the absense of a Chapter 9 settlement, but the Municipality is not required to devote substantially all of its resources to the repayment of creditors. In the absence of a Chapter 9 settelemtn, creditors of a General Obligation bond are guaranteed complete repayment "eventually" but this could take decades or longer. Under Chapter 9 a settlement might be for less than complete repayment but can happen sooner since the Municipality can void most labor contracts (including municipal pension obligations) under Chapter 9 (without any protection for labor like under Chapter 11), resulting in additional tax revenues becoming available for creditors.

In short a general obligation creditor is more likely to make a substantial recovery under Chapter 9 than under Chapter 11, but there is no guarantee of a complete recovery.


Thanks.

CANative1234 said:   BradMajors said:   It depends upon the State, each State has different rules. The above reference to Chapter 9 is for municipalities and is generally not relevant to States.

The bonds I am referring to are city bonds, and I'm worried about the City filing Chapter 9, so it is relevant.


Not all bonds are created equal, nor are they treated equally in bankruptcy.

BEEFjerKAY said:   Not all bonds are created equal, nor are they treated equally in bankruptcy.

In particular, revenue bonds are effectively not subject to Chapter 9 : Revenue bonds are repaid from revenue (eg Tolls) dedicated to them and as long as the revenue is sufficient will be paid in full and on time. If the revenue is not sufficient, Revenue Bonds are not paid in full. Neither situation changes in Chapter 9.

BEEFjerKAY said:   CANative1234 said:   BradMajors said:   It depends upon the State, each State has different rules. The above reference to Chapter 9 is for municipalities and is generally not relevant to States.

The bonds I am referring to are city bonds, and I'm worried about the City filing Chapter 9, so it is relevant.


Not all bonds are created equal, nor are they treated equally in bankruptcy.



Correct. I was just making the point that Chapter 9 is relevant because that is the chapter proceeding a city would need to file if it decided to go bankrupt. I think BradMajors thought I was talking about the state going bankrupt (or more accurately, put into receivership since it can't go bankrupt), which I'm not.

You may want to research online proposals that are coming up in the next congress to revise the BK code to allow States to file BK. Currently there is no provision for this in the US Code. The reason of course is that the Federal government does not want to have to bail out States, many of which are hopelessly upside down in their general obligation debts. So, if a State can file BK, it can restructure everything including getting out of pension obligations. Not sure how my bonds would fare in a State BK, I have California school district bonds which are State GO's. I can already see the prices being affected, and see the yields increasing.

CANative1234 said:   I've searched on FW and the internet, but the answers to this question are all over the place. So, what happens to a general obligation municipal bond if a city files a Chapter 9 Bankruptcy proceeding? Most of the information I have found suggests that the bondholder will eventually get their money back, but it may take a while. I know circumstances will vary, but any advice (or links to other threads discussing this that I may have missed) would be greatly appreciated.Well, one bondholder gets the keys to City Hall, another gets the police station, another gets some highway trucks, etc. If you only hold a couple bonds, you might get the strip of grass on the median of some side street.

States can go bankrupt. It just has never been allowed to happen by the Federal Government.

What state is this in? I know it is a city. Cities have filed for bankruptcy, but there are a number of states that are drafting plans to rescue some cities because they do not want all the union contracts for muni workers getting torn up.

I wouldn't assume the laws and contractual agreements apply if states and cities become desperate. It will all be completely disregarded if it's politically convenient. This is exactly what happened to GM bondholders... bankruptcy laws were completely disregarded and secured creditors got screwed and were not paid first.

If it comes down to a choice between laying off union city workers or screwing over bondholders then history shows what will happen.

I can already see the prices being affected, and see the yields increasing.The credit default swaps continue to rise for California. The really bad news is the CA Treasurer is taking to the CA papers to deny there is even a problem.

Mak2 said:   You may want to research online proposals that are coming up in the next congress to revise the BK code to allow States to file BK. Currently there is no provision for this in the US Code. The reason of course is that the Federal government does not want to have to bail out States, many of which are hopelessly upside down in their general obligation debts. So, if a State can file BK, it can restructure everything including getting out of pension obligations. Not sure how my bonds would fare in a State BK, I have California school district bonds which are State GO's. I can already see the prices being affected, and see the yields increasing.

Interesting - I hadn't heard that they were considering revising the BK code to allow states to file BK. I'll have to read about that.

axiom said:   States can go bankrupt. It just has never been allowed to happen by the Federal Government.

What state is this in? I know it is a city. Cities have filed for bankruptcy, but there are a number of states that are drafting plans to rescue some cities because they do not want all the union contracts for muni workers getting torn up.


I'm in CA, but the city is in the state of Arizona.

brettdoyle said:   I wouldn't assume the laws and contractual agreements apply if states and cities become desperate. It will all be completely disregarded if it's politically convenient. This is exactly what happened to GM bondholders... bankruptcy laws were completely disregarded and secured creditors got screwed and were not paid first.

If it comes down to a choice between laying off union city workers or screwing over bondholders then history shows what will happen.


Good point.

I don't think Arizona's state government would intervene if a city was exploring bankruptcy. I do think California would.

You can read about HAMTRAMCK, MI. They are actively exploring bankruptcy.

The only state that I know that was close to bankruptcy was Arkansas. FDR intervened and wiped away the bond holders.

brettdoyle said:   I wouldn't assume the laws and contractual agreements apply if states and cities become desperate. It will all be completely disregarded if it's politically convenient. This is exactly what happened to GM bondholders... bankruptcy laws were completely disregarded and secured creditors got screwed and were not paid first.

If it comes down to a choice between laying off union city workers or screwing over bondholders then history shows what will happen.


That is complete bullshit : GM secured bondholders had the option to take over the company and liquidate it : they chose to settle for the $2 billion offered by the Federal Government instead. GM secured bondholders were just disappointed that they did not benefit significantly from the bailout like the other parties involved (eg Labor).

CANative1234 said:   Interesting - I hadn't heard that they were considering revising the BK code to allow states to file BK. I'll have to read about that.

It may well end up being the only viable course of action for Illinois.

ananthar said:   That is complete bullshit : GM secured bondholders had the option to take over the company and liquidate it : they chose to settle for the $2 billion offered by the Federal Government instead. GM secured bondholders were just disappointed that they did not benefit significantly from the bailout like the other parties involved (eg Labor).

The bondholders were bullied based on threats that GM would be nationalized Hugo Chavez style and they would be wiped out if they did not accept. They ended up getting 5 cents on the dollar which is probably worse than a deal the mafia would have come up with.

brettdoyle said:   ananthar said:   That is complete bullshit : GM secured bondholders had the option to take over the company and liquidate it : they chose to settle for the $2 billion offered by the Federal Government instead. GM secured bondholders were just disappointed that they did not benefit significantly from the bailout like the other parties involved (eg Labor).

The bondholders were bullied based on threats that GM would be nationalized Hugo Chavez style and they would be wiped out if they did not accept. They ended up getting 5 cents on the dollar which is probably worse than a deal the mafia would have come up with.


First of all, secured bondholders only totalled $6 billion so they got 33 cents on the dollar. The unsecured bondholders got next to nothing, but they would have gotton absolutely nothing in a Chapter 11 liquidation. Most experts agree that $2 billion was a fair to generous estimate of what GM would have yielded in a liquidation. The secured bondholders could have outbid the Government's $2 billion bid with a $6 billion bid without putting up any cash : their $6 billion secured bonds would have been payment in full.

The only threat the government made was that if the secured bondholders bought GM's assets in the Chapter 11 liquidation auction, the government would provide no bailout funds at all and the Labor Unions would refuse to cooperate. This was in part a bluff, since the government and Labor Unions would still have been under tremendous pressure to bail out jobs, so there was a reasonable chance the Government would have blinked. The fact that the secured bondholders accepted the $2 billion cash suggests that the liquidation value of GM was probably less than $2 billion and they did not want to run the risk that the Government was not bluffing.

There is no way any court in USA would approve GM being nationalized "Hugo Chavez style".

There have been reports from analysts like Meridith Whitney that there will be a spate of municial bankruptcies. I don't believe it. That would completely screw up there bond rating, which in turn would screw up their projects, like stadiums etc that they love to do. There will be pension reform, but not bankruptcy.

There will be pension reform, but not bankruptcy.Of course. However, the pensioners are the voters. That's the big gamble here. What do the pensioners want? They want their pensions. Well, the pensions are too generous based on current revenues. So, pensioners say raise taxes to pay them. But whose? Someone else's taxes usually.

What happens right now is the insurance on the bonds floated by these miscreant muni and state governments rises day after day via the credit default swaps.

I'd like to see a case go to the courts so we can find out if a judge can order a tax increase.

cameron2003 said:   There have been reports from analysts like Meridith Whitney that there will be a spate of municial bankruptcies. I don't believe it. That would completely screw up there bond rating, which in turn would screw up their projects, like stadiums etc that they love to do. There will be pension reform, but not bankruptcy.High spending and low taxes trumps all resemblance of responsible financial management, and coming to the rescue with additional funding makes people look like heros (and scores them alot of cheap votes on the taxpayer's dime). Thus counties will bail out cities, states will bail out counties, and the Feds will bail out states; everyone gets credit for saving the day, while we the people ignore the fact they're the same ones that created the mess in the first place.

cameron2003 said:   There have been reports from analysts like Meridith Whitney that there will be a spate of municial bankruptcies. I don't believe it. That would completely screw up there bond rating, which in turn would screw up their projects, like stadiums etc that they love to do. There will be pension reform, but not bankruptcy.

This is inaccurate. Whitney has predicted a string of municipal defaults. This is not the same as bankruptcy.

Good reading:
http://citiesspeak.org/2010/12/22/crying-wolf-about-municipal-de...

To a certain degree who cares what they do. You as a resident are free to move where ever you want to or need to. When your City and or County start adding in the fees, raising taxes, special assessments...cutting police and fire dept (because we all know that the clerk servicing lawn sprinkler permits has to stay), then simply move. I recently read article how some municipalities are going after schools and churches for fair share on road improvements etc....

JaxFL: The primary driver for owning muni bonds isn't because you live there. It's mainly to lower your taxable assets and to protect your wealth.

axiom said:   JaxFL: The primary driver for owning muni bonds isn't because you live there. It's mainly to lower your taxable assets and to protect your wealth.I was looking at it from the perspective of a resident of municipality, not a holder. I guess that wasnt obvious.

Didnt Vallejo CA declare bankruptcy?

Dup

srl99 said:   Didnt Vallejo CA declare bankruptcy?

Yes, but as I understand it, the city wasn't able to cut the pension benefits for police/firefighters (which was the root of their financial woes), so I'm not sure how effective it was/will be. I believe that the thought is that bondholders will come out okay in Vallejo.

JaxFL said:   To a certain degree who cares what they do. You as a resident are free to move where ever you want to or need to. When your City and or County start adding in the fees, raising taxes, special assessments...cutting police and fire dept (because we all know that the clerk servicing lawn sprinkler permits has to stay), then simply move.But people are entitled to live where they choose and have the municipality accomodate them however needed. Its simply ridiculous to expect someone to move when they can no longer afford where they are currently residing; they deserve help (ie, a bailout), not a kick out the door.....

CANative1234 said:   srl99 said:   Didnt Vallejo CA declare bankruptcy?

Yes, but as I understand it, the city wasn't able to cut the pension benefits for police/firefighters (which was the root of their financial woes), so I'm not sure how effective it was/will be. I believe that the thought is that bondholders will come out okay in Vallejo.
It chose not to 'wage' that battle.

Its simply ridiculous to expect someone to move when they can no longer afford where they are currently residing; they deserve help (ie, a bailout), not a kick out the door.....Do they? Taxes afford some sort of lifestyle such as public safety and safe infrastructure. However, nobody is entitled to that. It comes with a cost - property taxes.

I do think that residents should exercise their civil rights and complain about incredibly generous pensions and benefits for public sector employees. They should start by not voting for politicians in the pockets of public employee unions.

I have yet to see a government default on its loans. Yet, I live in California and I don't know what the situation is in other states. In California, I've seen Oakland Unified School District, City of Bell, City of Vallejo and others being on the verge of filing for bankruptcy but yet the State always kicks in and give them a loan to pay off other loans. In other words, the State will always bail out local governments. Florida one time came close and the federal government gave them a loan and bailed them out.

axiom said:   CANative1234 said:   srl99 said:   Didnt Vallejo CA declare bankruptcy?

Yes, but as I understand it, the city wasn't able to cut the pension benefits for police/firefighters (which was the root of their financial woes), so I'm not sure how effective it was/will be. I believe that the thought is that bondholders will come out okay in Vallejo.
It chose not to 'wage' that battle.


Ha! Very "punny."

Skipping 8 Messages...
axiom said:   It depends. I do not think people will oppose a tax increase if they know their taxes are going towards necessary government spending. I do think people have a major problem where they work in the private sector with flat wages, a 401K instead of a guaranteed pension, and reduction in the values of their assets to have their taxes raised to pay for unproductive, guaranteed pensioned, well heeled benefits, for public sector employees that can retire at 55.

The private sector won't stand for subsidizing a public sector class of privileged individuals.

Typical - and factually wrong - statement.
Only emergency responders have an early retirement, the rest of Fed/State/County/Citi employees generally retire the same age as everyone else. Since we have 4 layers of government (highest in the world) rules might wary, but complexity and overhead is not employee's fault.

It is convenient though to hate government workers - takes your attention away from Wall Street and politicians.



Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

TRUSTe online privacy certification

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2014