Thursday, January 20, 2011

5 to 20 Cents on the Dollar - The Muni Bond Disaster is Here - NOW - Yes, This Does Effect Little Old You

By Nicholas Contompasis

Those that sell you munis will tell you "but, but munis always pay back almost 100 cents on the dollar, even in bankruptcy". Not quite.  Bankrupt Vallejo just filed a POR to pay back unsecured creditors between 5 and 20 cents. "The city regrets that it cannot pay a higher percentage,” Vallejo officials said in the court filings. “The city lacks the revenues to do so while maintaining an adequate level of municipal services, such as the provision of fire and police protection and the repairing of the city’s streets."

The reaction to this when holders of other unsecured debt for all those other (hundreds or thousands) insolvent cities, towns, and states realize that a 5 cent recovery is all too possible, will further the pressure on the sector. Stories like this that will become all the more common in coming months will make it tough for the muni's raise new capital through bond sales at reasonable rates and for present investors to remain in their holdings. It creates a negative feedback loop just like when mortgage bonds began to collapse in 2006. Selling brings lower prices, which begets fear and more selling and so on.

The reason nobody will admit this is a serious problem is because any money manager you ask about them either owns them or sells them. If not, they know that what they do sell you -- stocks, mutual funds etc -- would go through a really bad period if the muni bond market were to come under fire.

There are $3 trillion in outstanding munis covering literally everything from state general obligations to city parks. Obviously, not all are bad. Those in over-levered cities and states such as CA, NV, FL, IL, NJ etc are much higher risk than those in Montana for example. But it doesn't not take all to be bad to put serious pressure in the sector and cause a rout. Remember, Subprime mortgage bonds were only $2 trillion of a $57 trillion mortgage market and look what happened when they imploded.  Further, the popularity of bond funds and etf's in recent years have made it so investors can easily sell and buy but when you sell an etf made up of a variety of bonds it basically causes indiscriminate selling pressure across the sector.

It's a simple math problem of paying for the massive excess debt, leverage and spending from 2000 through 2007 with today's revenue. Some municipalities barely had a balanced budget in 2006 at the peak of revenue. Raise taxes by double digit percentages? Not in CA due to props 25 and 26 both passing. And even if they did, it would drive revenue from muni. Cut services -- again, it drives away income.

Vallejo Plan Would Give Unsecured Creditors 5 to 20 Cents on the Dollar

Wednesday, January 19, 2011

By Randall Jensen

SAN FRANCISCO — Unsecured creditors will receive 5 cents to 20 cents on the dollar for their claims under a reorganization plan Vallejo, Calif., filed Tuesday in federal court.

The plan to exit bankruptcy outlines the reorganization of debt the city owes its largest creditors, Union Bank and National Public Finance Guarantee. It also sets aside a pool of $6 million to pay unsecured creditors about 5% to 20% of their claims over two years, according to court documents filed in U.S. Bankruptcy Court for the Eastern District in Sacramento.

“The city regrets that it cannot pay a higher percentage,” Vallejo officials said in the court filings. “The city lacks the revenues to do so while maintaining an adequate level of municipal services, such as the provision of fire and police protection and the repairing of the city’s streets.”

The city has also settled with NPFG over fees that backed insured certificates of participation, according to court documents.

The formal legal plan is based on a five-year road map City Council members approved at the end of November, tackling $195 million in unfunded city pension obligations, cutting payments for retiree health care, reducing pension benefits for new employees, raising pension contributions for current workers, and creating a rainy-day fund.

Union Bank, the largest creditor, is owed $50 million after holding letters of credit on four series of defaulted COPs. The filing indicates Union Bank will get a new “lease-leaseback” obligation in exchange for canceling the COP series. It will also get $6 million of unspent proceeds from the COPs held under trust agreements.

Union Bank is slated to get 40% less than what it would have received from the original COP scheduled payments, according to the Vallejo filing.

NPFG had sued for access to state vehicle license fees that backed $4.8 million of defaulted 1999 COPs. Under the plan, the insurer will get reduced and restructured payments through fiscal 2024-2025 as part of an agreement with the city outlined by the court documents.

Vallejo’s exit strategy includes restructuring the debt owed to unsecured creditors, many of which are employees and retirees, by creating a $6 million pool of cash that will be paid out over two years. They will still be able to pursue one of the city’s insurance pools to settle the liabilities, according to the documents.

The city received 1,013 proofs of claims. They are comprised of 969 general unsecured claims, 12 unsecured priority claims, and 32 secured claims, according to court documents. The claims totaled $479 million, with $262 million of general unsecured claims, $45 million of unsecured priority claims, and $172 million of secured claims.

Eventually, creditors will vote on the plan and the court will evaluate the voting before any approval is given.

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