Vallejo Offers 5 - 20 Cents on the Dollar for Unsecured Creditors

And secured creditors are not much better off. They will take 40% haircut if the restructuring plan is approved.

I have some well-to-do friends. They are retired, invested heavily in fixed income including munis. I told them to dump munis and buy gold with that money when gold was slightly below $1,000. Their reaction was all too typical of the rich but not very informed on financial markets and economy in general: Why? Gold is dangerous, too speculative!

That was two years ago, when gold was forming a reverse head and shoulders pattern.

I wish they had listened. They will probably wish the same soon enough. Oh well, I tried. I hope they have secured bonds at least...

From Zero Hedge:

Harbinger Of Muni Bloodbath: Vallejo Offers Unsecured Creditors 5 - 20 Cent Recovery

But, but, munis always pay back almost 100 cents on the dollar, even in bankruptcy, right? Wrong. 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." Just wait for the reaction when holders of unsecured debt all those other (hundreds of) insolvent cities, towns, and states realize that a 5 cent recovery is all too possible...

And now for the bad news, from Bond Buyer:

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 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.

(Damn, there goes Union Bank's free checking...)

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