California Plan Is Hope for Bondholders (Municipal Bonds)

Wall Street Journal ^ | FEBRUARY 9, 2011 | Jeannette Neumann

[Presbyterian Reporter]

The restructuring plan that Vallejo, Calif., is hammering out with creditors provides some assurances for skittish bondholders and pensioners about their fate in a municipal bankruptcy.

But the case, one of the few recent bankruptcies of a city with outstanding debt, also shows that bondholders' odds of getting paid can depend on the type of bond they own and whether it is insured. And while Vallejo workers' pensions appear to be emerging unscathed, the case generated a ruling that cities could invoke in bankruptcy to break collective-bargaining agreements with unions, lawyers say.

Vallejo, a city of about 120,000 people near San Francisco, sought bankruptcy protection in 2008, saying the real-estate downturn and decreased tax revenues left it unable to afford workers' salaries or benefits and other costs. Last month, it submitted to a federal bankruptcy court a restructuring plan that now requires a vote by stakeholders and court approval.

The development comes as fear of increasing bond defaults and bankruptcy filings by governments has helped rattle investors in the $2.9 trillion municipal-bond market.

On Wednesday, a House Oversight and Government Reform subcommittee is slated to hear testimony from municipal-market observers as the first of a series of hearings on state and local debt. Next week, a House Judiciary Committee panel is expected to hold a hearing on whether federal law should be changed to permit states to file for bankruptcy protection.

A main takeaway from Vallejo for bondholders, observers of the case say, is the importance of bond insurance or some other backstop such as a letter of credit from a bank. Thanks to such protections, most original holders of Vallejo's bonds have been paid in full or are being paid. Investor protections "paid off" for investors, said John Knox, an attorney representing Vallejo in the bankruptcy case.

[Presbyterian Reporter]

Contrary to the near panic of the past few weeks, it appears the Vallejo, California bankruptcy may not be that bad for the bond holders.

So unless there is a surge in municipal bankruptcies, it seems the bondholders are going to be ok.

[lack-of-trust]

as long as the bond insurers hold up.

[businessprofessor]

“Contrary to the near panic of the past few weeks, it appears the Vallejo, California bankruptcy may not be that bad for the bond holders.”

For now at least. This situation is only round one. Cities and states will desperately try to avoid defaults. They will stiff other creditors first but then they will not be able to buy products and services. Eventually, bond defaults are comnig unless the crushing pension debt is resolved.

[truthguy]

Congress needs to change the Bankruptcy Laws so a state can go Bankrupt. Bankruptcy is California’s only option. They have dug themselves a hole so deep that only bankruptcy can save them now. There is no way California can get themselves out of this problems with bankruptcy. California needs to be put under the control of a bankruptcy judge and have the power taken away from the Democrats in Sacramento. California needs to suffer for her sins.

[rahbert]

California needs to suffer for her sins.

...send Calif to purgatory. 25 years for each venial sin and 50 years for each mortal sin (according to Mr Gaultieri).

[Tea Party Reveler]

To Hell With Vallejo AND Solano County!

YouTube = Solano Communist County - Solano USSR!

YouTube = Solano Community County - Welfare Rats OUT, Business IN

[Presbyterian Reporter]

Congress needs to change the Bankruptcy Laws so a state can go Bankrupt

____

Can you give me some reasons why that would be a good idea?

The last government sponsored bankruptcy was GM. The unions won and the bond holders lost.

I would think that in a State bankruptcy, the state employee unions would win and the bondholders would lose.

[truthguy]

Can you give me some reasons why that would be a good idea?

Yes, I can give you some reasons after living here for over 25 years:

1. Californians (in the aggregate) are childish people and the humiliation of bankruptcy would do them good.

2. Republicans are in control of Congress this time around and the state would not get any sweetheart deals.

3. Democrats are in complete control of CA and it would fall on their shoulders.

4. California is ungovernable and people need to understand that. Bankruptcy would drive it home.

5. Buyer beware! California Munis have been a bad deal for a long time. I wouldn't go downwind from a CA Muni. People who bought them should have been aware. California will have a very difficult time borrowing money as they are now for their high speed rail boondoggle. This would be a good thing. It would force California to live within their means, something they haven't done for a long time.

6. Lastly it would be funny to see the state go bankrupt with Jerry Brown as governor. It would be poetic justice. He had so much to do with the initial forces that caused the bankruptcy and he's the type of person who has caused the problem.

[Presbyterian Reporter]

Thank you for the reply.

I see your points and can agree.

Though at the end of the day I do not support bankruptcy by the states as politicians will use it as a means to clean up the mess they have created only to create a new mess following bankruptcy.