A court on Thursday afternoon approved the reorganization plan and subsequent Chapter 9 exit for Central Falls, R.I., only 13 months after it filed for bankruptcy.
Judge Frank Bailey, ruling in the U.S. Bankruptcy Court for the District of Rhode Island in Providence, said Thursday he would issue an order later formally implementing the restructuring plan.
Only two of the 239 creditors voted against the plan, which would take effect in 44 days, after an appeal period.
Bailey, assigned to the case from Boston, praised all parties.
“Rarely does the shoe fit quite as cleanly as the shoe fits in this case, where we have had a community of pain for 13 months. From pain, it’s my sincere hope that from the confirmation of this plan of adjustment, the parties will be able to join together now in a healing process with a healthy financial community,” Bailey said.
“This case was filed 13 months ago. In my limited knowledge, this is the fastest case to go in this history of Chapter 9, of real municipalities, to go from filing to confirmation, “ he said. “This is a record time and record efficiency. In a way, I think that this is an example not only for Rhode Island but maybe the nation on how to run a Chapter 9.”
According to the plan, the state of Rhode Island, which seized control of the 19,400-population city more than two years ago, would transfer operations back to local officials in January. State officials could intervene if the city doesn’t meet budgetary benchmarks.
Under receiver John McJennett’s six-year, balanced-budget plan, the court retains jurisdiction for the first five years.
According to court documents, Central Falls projects operating surpluses in coming years.
Central Falls, a one-square-mile city seven miles north of state capital Providence, had an $80 million unfunded pension liability when it filed under Chapter 9 on Aug. 1, 2011. It is Rhode Island’s poorest city.
While in bankruptcy court, then-receiver Robert Flanders negotiated a 55% reduction in pension and other post-employment benefit costs.
“[The city] has done its best to treat creditors fairly, given the extremely difficult circumstances,” Ted Orson, the city’s bankruptcy attorney and a name partner at Orson and Brusini Ltd., told the court.
Legal and capital markets experts praised Central Falls for its quick and focused march through bankruptcy, but warned that tough times still remain for the little community.
“Central Falls knew how to make tough choices and execute a plan. They made a decision that they were going to honor their bond obligations and swallow their medicine,” Roberto Kampfner, a financial restructuring and insolvency partner with White & Case LLP in Los Angeles, said in an interview Thursday.
“At the end of the day, Chapter 9 is a platform for solving problems. But they are still subject to the same politics and issues as before,” Kampfner added. “They will have to broaden their tax base and keep pension costs from ballooning. They have a five-year runway, but they’ll have to keep their eyes on pension costs day by day, year by year.”
As Central Falls teetered in 2010 and 2011, the state passed laws establishing a three-tiered intervention system for distressed municipalities and granting bondholders priority in a bankruptcy filing. The latter helped protect the credit rating of cities and towns in the nation’s smallest state and even the state itself.
“Passing this statute and lifting bondholders to a priority level had a tremendously positive effect,” state revenue director Rosemary Booth Gallogly said in an interview with The Bond Buyer.
The judge's approval “promises to return the highly distressed city of Central Falls to a financially viable community," Gov. Lincoln Chafee said late Thursday. "As a result of this plan, the city will have a balanced budget until 2017 including a sustainable pension and healthcare system for retirees.”
Moody’s Investors Service, anticipating a bankruptcy exit, placed the city’s Caa1 rating on review for upgrade in late June, though that rating is still deep into junk status. Moody’s expects to complete its review later this month.
“The review will consider the terms of the final bankruptcy plan, any last-minute challenges to the plan by creditors, and the city’s plan to balance its operating budget … including payment of debt service as well as pension contributions and OPEB payments,” Moody’s said.