SAN FRANCISCO — Conventional wisdom that municipalities that file for bankruptcy “will never borrow in this town again” has not been found to be true.
“I don’t think we ever really believed that they would never be able to sell debt again,” said Eric Hoffmann, who heads Moody’s Investors Service California team. “I think in the history of the market, we have seen huge sovereign losses – and they get back in within 18 months.”
Hoffmann was speaking on a panel discussion of bankruptcy at The Bond Buyer’s California Public Finance Conference.
It might require more collateral and interest rates may be higher, but history has not shown that the market bars recalcitrant borrowers from accessing financing post-bankruptcy, panelists said.
“Certain credits have better market access than others,” said Barbara Flickinger, a managing director with National Public Finance Guarantee. “Some municipalities will have to offer better security than they have in the past; Detroit has had to do that.”
Orange County, Calif. which filed for bankruptcy more as the result of a one-off problem than systematic financial problems, honored obligations coming out of bankruptcy, and was treated differently than others when it sought market access, she said. For the entities still struggling after recent Chapter 9 bankruptcies, the story may well be different, Flickinger said.
Mike Busch, chief executive officer of Urban Futures Inc., whose firm has been advising San Bernardino, Calif. in its bankruptcy, said that is why the city has been working hard to craft a bankruptcy exit that will leave the city financially stronger.
“I think the markets are tracking the plan of adjustment and the forecasts more closely – and then will decide if the city is following the plan of adjustment or not,” Busch said.
Busch added that he has heard that the better you treat a creditor in bankruptcy, the better you will be treated outside of bankruptcy.
Investors, rating analysts and insurers are looking more closely at individual credits – and drawing greater distinctions between the different varieties of bonds in ratings and underwriting.
“Good luck trying to sell a pension obligation bond [post bankruptcy],” Hoffmann said.
