Creditors stand to recover 75% on their Harrisburg, Pa., general obligation bonds, Moody's Investors Service reported late Thursday, two days after a Pennsylvania judge signed an order approving the capital city's exit from state receivership.
Commonwealth Court of Pennsylvania Judge Bonnie Brigance Leadbetter approved the state's exit request in a five-page order. In September she approved the so-called Harrisburg Strong financial plan aimed at keeping the 49,000-population city out of bankruptcy.
The recovery plan hinged upon the sale of the city's incinerator to the Lancaster County Solid Waste Management Authority and a long-term lease of parking assets from the city and the Harrisburg Parking Authority to the Pennsylvania Economic Development Financing Authority. Bond sales for both closed in late December.
The deal also included some concessions from the main creditors of the incinerator debt, Dauphin County and Assured Guaranty Municipal Corp.
According to Moody's, direct bondholders are being paid in full, either by bond insurers or by backup guarantors such as Dauphin County. These intermediaries then became Harrisburg's GO creditors.
"Our calculations reflect what the city ultimately paid to its creditors, compared to what it was contractually obligated to pay," said Moody's.
Moody's made three key observations:
The 75% initial recovery rate for the city's GO debts maps to an implied rating of Caa3, consistent with the rating company's "meaningfully lower" recovery rates in recent U.S. local government defaults compared with historical averages as high as 96% in the period of the Great Depression.
That percent is an aggregate of the full recovery for the city's direct GO bonds and a 66% recovery for debts of the Harrisburg Authority that the city guaranteed with a GO pledge. "The higher recovery for the direct GO bonds versus the GO-guaranteed debt suggests that GO-guarantees could have weaker recoveries in future municipal default situations, despite their identical legal pledges with direct GOs," said Moody's.
And even within the GO-guaranteed creditor group, recovery rates varied widely, said Moody's, largely because of political, legal and practical circumstances. Recovery rates ranged from 75% (Dauphin County) to 39% (Covanta Energy, which operates the incinerator).
According to Moody's, the disparity in these recovery rates is similar to the recent settlement in Jefferson County, Ala., as well proposals offered to creditors by bankrupt Detroit and Stockton, Calif., suggesting a rising pattern of dispersion in recovery rates in municipal defaults, even within the same broad security class.
