PHOENIX – The general obligation bonds of 16 Arizona issuers are on Fitch Ratings' positive watch because of a new law that may give them preferential treatment in a bankruptcy proceeding.
The amendments to Arizona law were passed earlier this year and signed into law by Gov. Doug Ducey last month, becoming effective Aug. 9. The law provides GO bondholders with a statutory lien on ad valorem taxes of cities, towns, counties, school districts, community college districts and various special districts in the state.
“Fitch has reviewed the statute and believes it provides bondholders with a substantial preferential right in a bankruptcy proceeding, and warrants a GO bond rating up to two notches higher than the entity's Issuer Default Rating (IDR),” Fitch said. “The statutory lien applies only to ad valorem tax revenues and applies to GO bonds both previously issued and to be issued in the future.”
A statutory lien is defined in U.S. bankruptcy law, and preserves bondholder rights to tax revenues securing bonds issued by a locality after it enters bankruptcy court. This protection does not prevent a payment default, Fitch noted, but the holder of a statutory lien is entitled to recover its value in the bankruptcy proceeding.
“As a result of the robust protection afforded bondholders benefiting from a statutory lien in a bankruptcy, Fitch rates ULTGO bonds backed by revenues with a statutory lien for bondholders two notches higher than the IDR,” the agency said.
The affected issuers are: the cities of Phoenix, Peoria, Prescott, Tolleson, Tucson, and Casa Grande; the Apache Junction Unified School District No. 43, Deer Valley Unified School District No. 97, Maricopa County Unified School District No. 89-Dysart, Nadaburg Unified School District No. 81 of Maricopa County, Paradise Valley Unified School District No. 69, Pendergast Elementary School District No. 92, Tucson Unified School District No. 1, Vistancia Community Facilities District (Peoria), and the Yuma County Free Library District.
Fitch said it will “consider appropriate rating action” on the bonds of those issuers after the law takes effect in August.