Coming Soon: Chapter 9 Municipal Bankruptcies

“People believe that municipal debt is safe based on assumptions that are no longer true.”
-Kenneth Buckfire

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The above quote comes from the CEO of Miller Buckfire & Co., an investment bank that is currently advising cities on municipal restructurings. Technically, these are called Chapter 9 reorganizations.

The WSJ notes:

“The seldom-used part of U.S. bankruptcy law gives municipalities protection from creditors while developing a plan to pay off debts. Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders.

The economic slump, however, is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds. And that is causing experts to worry about the safety of securities traditionally considered low risk.”

There have been but 600 cases since this chapter of the bankruptcy code became law in 1934. The largest Chapter 9 filing was back in 1994, when Merrill Lynch bankrupted Orange County, California via a form of unsuitable investments that lost a billion plus dollars on a form of Interest Rate Swaps.

Given the various pressures states and cities are under, a surge in municipal bankruptcy filings is all but unavoidable . . .

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Source:
Muni Threat: Cities Weigh Chapter 9
IANTHE JEANNE DUGAN And KRIS MAHER
WSJ, FEBRUARY 18, 2010
http://online.wsj.com/article/SB20001424052748704398804575071591602878062.html

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