LOS ANGELES — San Bernardino, Calif. reached a settlement agreement that gives bondholders a major haircut that is substantially better for them than the city originally proposed in its Chapter 9 bankruptcy.
The deal with bondholders and insurers calls for San Bernardino to give them a 40% recovery.
It's significantly more than the 1% the city first proposed, but continues a trend of bonds faring worse than pensions in Chapter 9 cases.
Under the settlement, COMMERZBANK Finance & Covered Bond S.A., formerly Erste Europäische Pfandbrief-Und Kommunalkreditbank AG, and municipal bond insurer Ambac Assurance Corporation, would drop their opposition to the city's bankruptcy plan.
The holders of $50 million in pension obligation bonds will receive payments equal to 40% of their debt on a present value basis, discounted using the existing coupon rate, according to city officials.
San Bernardino would join Stockton, Calif. and Detroit in the ranks of recent Chapter 9 cases in which bondholders have taken a substantial haircuts, while pension benefits are touched lightly or not at all.
The settlement reduces the city's payments to the pension bondholders by roughly $45 million. The payments will be made over a 30-year period starting a year after the city's Chapter 9 bankruptcy exit plan is confirmed.
"The settlement will end the costly legal battles between the City and the settling creditors over confirmation of the City's Chapter 9 Plan of Adjustment, as well as how much the creditors are to be paid," City Attorney Gary Saenz said in a statement Tuesday.
The 30-year term will give the city the cash flow needed to implement a five-year police plan, infrastructure maintenance, beautification projects, and reinvestment in parks and community services, according to city officials.
On the second anniversary of its bankruptcy exit, the city would make a $1 million single installment payment to bondholders, according to court documents. On the third year, the city would distribute $1.3 million, payable in two equal semi-annual installments. The agreement calls for payments to increase to semi-annual payments of $1.37 million in the fourth year with payments increasing every several years to reach $2.5 million in the 26th year through the 30th year.
The bondholders and insurers objected when the city filed its plan to exit bankruptcy and its disclosure statement on May 29, 2015, after nearly three years in bankruptcy,. They had filed an appeal opposing the plan.
Under the terms of last year's exit plan, holders of the $50 million of unsecured POB claims would have received payments of $655,000 plus interest over time, and holders of general unsecured claims between $130 million and $150 million would receive a pro rata share of $1.3 million after the plan became effective.
The $50 million in 2005 POBs are split between a $36 million Series A-1 and $14.3 million Series A-2 of capital appreciation bonds. Ambac insures only the CABs.
Neither Vince Marriott III, who represents COMMERZBANK, nor Paul Aronzon, who represents Ambac, could be immediately reached for comment.