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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Harrisburg, PA Bankrupt Over Garbage Incinerator

Harrisburg, Pennsylvania, was told to consider bankruptcy, which "may offer Harrisburg relief from $68 million in debt-service payments this year tied to a waste-to-energy incinerator project," Bloomberg reports.

Harrisburg, the state capital, "has guaranteed payments on $282 million in bonds on the incinerator, run by the Harrisburg Authority. The payments on the bonds and on a working-capital loan this year add up to four times the amount the city collects in property taxes each year, budget documents show."

PennLive.com reported on April 8 that the Harrisburg Authority would look into the controversial incinerator deal - $125 million bond deal in 2003 to repair and upgrade the Harrisburg incinerator after the EPA shut it down. The bond was not a performance bond. The city and county was left with the debt when the repair job was botched.

$68 million in debt-service payments exceed the city's annual budget, according to PennLive.com. The new mayor of the city, Linda D. Thompson, wants to sell off city's assets like parking garages and dam to pay the debt, instead of bankruptcy. She says the city has already identified a real estate agent who can quickly evaluate land assets that the city has.

Hmmmm. Who is this woman, who wants to sell out the city to pay the investors?

And who are the investors of this bond, and which bank was the underwriter of this bond? (My best guess is one of those Wall Street firms, but I could be wrong.) Who was a liaison between the bank and the city council? And who holds the CDS on the bond?

How did the original $125 million balloon into nearly $300 million? (Interest rate swap, anyone? Say the bank would accept 6% fixed rate interest payment from the city, and pay the city at a floating rate. The problem is that the floating rate, which is often pegged to short-term LIBOR, cratered to near zero when the credit market froze and the financial markets crashed in 2008.)

It seems municipal governments across the country went on a borrowing and spending binge in the early 2000's to build a world-class garbage incinerator or sewage treatment plant or power line (or whatever they can spend money on). Jefferson County in Alabama almost went bankrupt after having splurged on the sewer treatment plant, thanks to the bond (with the interest rate swaps) underwritten by J.P. Morgan. Here's another one from Seattle area, Snohomish County, paying AIG $14 million to get out of the swap agreement that it entered to reduce interest expenses on the debt, which was used to build power lines and electric poles. This one was underwritten by Smith Barney, later absorbed by Citigroup.

I expect many more stories like these to surface in the not-too-distant future.

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The Government May Enter Muni Bond Insuring Business

I knew it! I knew it was coming. According to Bloomberg,

"The National League of Cities says it will ask the U.S. Treasury today for a $5 billion interest-free loan to capitalize a new municipal bond insurer it plans to create."

So we, taxpayers, get to fund a muni bond insurer who will insure muni bonds which are the obligations that we, taxpayers will eventually have to pay.

"The Issuers Mutual Bond Assurance Co. would be the first publicly owned U.S. financial guarantor. The $5 billion capitalization would make it the biggest in the industry, eclipsing MBIA Inc.’s capital base of $3.8 billion and the $1.1 billion of current market leader Assured Guaranty Inc. "

This is the "business plan", as presented by the National League of Cities. (I don't think it would pass the scrutiny at any venture capital, but then they have Treasury Department.) The largest business risk that they foresee is that the federal government may enter the forey:

"... the federal government could create a competing company that charges premiums so low that the Issuers Mutual could not possibly compete. This will be most unlikely if the U.S. Treasury invests $5.0 billion in Issuers Mutual, as planned. But it is possible that the Congress might enact legislation creating such a company, notwithstanding the investment by the Treasury. In such case, the Company would cease operations..."

They seem to be aware of the risk of premiums collapsing, but they dismiss it as unlikely. Again back to Bloomberg,

"IMBAC, as the new insurer would be known, is asking Treasury for $3 billion in cash upfront. It said it would seek to insure only general obligation and essential-purpose revenue bonds. In its cash-flow projections, the firm said it would charge premiums equal to about 70 basis points on a 25-year bond."

That seems like an overly optimistic business projection to me. Bloomberg again,

"In a December report, the League observed that in 2006, premiums for bond insurance had dwindled to as low as 15 basis points. Last week, Richard E. Kolman, the executive vice- chairman of MIAC, the Macquarie-Citadel venture, said he thought insurers might charge 30 basis points to 75 basis points to back A rated general-obligation debt. "

Sign of times.

First it was mortgage companies (FNM, FRE), then an insurer (AIG), then major national and regional banks, then car companies (Chrysler, GM), and now a municipal bond insurer. Healthcare is fast joining them. If the government add a large homebuilder or two, a major oil company (in order to kill it), a large media outlet (some say the media is already "owned"), a large consumer staples company or two, we will be solidly on our way to ___________. (Fill in the blank, any way you see fit.)

Disclosure: I own the shares of one of the "failed, shareholder-owned" bond insurers (ABK).

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