RIVERSIDE, Calif. — San Bernardino's bankruptcy case shed more light on what bondholders can expect from Chapter 9, participants said in interviews after the city's "final, final" confirmation hearing Friday.
San Bernardino was able to issue water and sewer revenue bonds a month before its final bankruptcy confirmation hearing, but pension obligation bondholders are taking a massive haircut.
"It has been a lot of work and the city has made a lot of tough decisions, but I think some of the things the city has done will become best practices for cities in distress," said Urban Futures Chief Executive Officer Michael Busch, whose firm provided the city with financial guidance throughout the four-plus years of bankruptcy.
U.S. Bankruptcy Judge Meredith Jury gave her oral ruling in favor of bankruptcy exit on Dec. 6.
She still hasn't issued her final written ruling, but Jury said during Friday's hearing it will diverge little from the redline suggestions made to her preliminary ruling by the city in a 50-page filing on Jan 26.
"It truly is a milestone," said San Bernardino Mayor Carey Davis. "After today, we have approval of the bankruptcy exit confirmation order."
The city has already implemented much of what is contained in the confirmation plan, Davis said, adding that it poises the city for growth and a successful bankruptcy exit.
The city outsourced fire services to the county and waste removal services to a private contractor to save money. It also reached agreements with city employees – including police officers and retirees – to substantially reduce healthcare benefits to lessen pension reductions.
San Bernardino entered bankruptcy in July 2012 and reached an agreement in substance with the California Public Employees' Retirement System in June 2014 and with pension bondholders two years ago.
The agreement on $56 million in pension obligation bonds continues a trend of bonds faring worse than pensions in Chapter 9 cases.
The city agreed to pay bondholders 40% of what they are owed, rather than the more severe 1% it originally proposed, because the agreement allowed it to stretch out payments 20 years.
The pension bondholders and attorneys for Ambac, the bond insurer, were able to get the city to agree to a better recovery than the 1% originally proposed to avoid further litigation, said Vincent J. Marriott III, a partner with Ballard Spahr, who represents Commerzbank Finance & Covered Bond S.A., the pension bondholder.
Attorneys for the pension bondholders had argued that the pension bonds should be treated the same as CalPERS, which received a nearly 100% recovery. The city failed to make $13 million in payments to CalPERS early in the bankruptcy, but set up payments to make the public employee pension fund whole.
Jury ruled against the argument made by pension bond attorneys two years ago, but Marriott and Ambac's attorneys filed an appeal that was stayed pending further mediation that resulted in the larger recovery, Marriott said.
The pension bondholders also went into mediation again prior to exit confirmation, but "the issues at the end that required mediation were discrete in focus," Marriott said. "We have reached substantial agreement with the city."
Though they were able to get the city to increase the recovery for pension bondholders, Marriott said future investors will look at such bonds with a somewhat jaundiced eye.
"Recoveries for bondholders in municipal bankruptcies to date have been less than bondholders would have expected," Marriott said.
The San Bernardino Municipal Water Department was able to successfully issue $68 million in water and sewer bonds at competitive interest rates in November and December, before the city's bankruptcy exit, Busch said.
The bonds will be paid for by water and sewer revenues, which were not included in the bankruptcy, Busch said.
The department sold $68 million in new money bonds in two sales last year. It also refunded loans of roughly $17 million that were issued through the California Infrastructure and Economic Development Bank in 2002, 2007 and 2012 for economic savings, according to a water department press release.
The bonds received A underlying ratings with a stable outlook from S&P Global Ratings, boosted by insurance from Build America Mutual for the water revenue bonds and Assured Guaranty Municipal Corporation for the sewer treatment revenue bonds.
The bonds priced with a true interest cost of 3.74% for the water bonds and 3.97% for the sewer bonds, which equates to a combined average annual debt service of $4.96 million over 30 years, according to the release.
The proceeds will be used to fund improvements such as seismic upgrades to the city's water reservoirs and funding for the first phase of the Clean Water Factor – Recycled Water Program.
Even with the final confirmation hearing behind it, the city still has a few more months before it closes the book on Chapter 9.
One civil litigant, whose attorney argued his clients should receive more than the 1% recovery for unsecured creditors on a claim his client suffered a brain injury in a beating by police, is expected to appeal Jury's ruling.