CA city bankruptcies unnerving bond industry

The fallout from municipal bankruptcies in Stockton and San Bernardino continues to play out in unexpected ways, with old presumptions that most significant creditors would be treated similarly falling to the way side.

This week, Franklin Templeton filed vigorous objections to Stockton’s recovery plan, saying “no bondholder has ever received so little in the history of municipal bankruptcy.”

This is from Reuters:

The creditor, two funds managed by Franklin Templeton Investments, said Stockton’s plan to exit Chapter 9 bankruptcy was discriminatory and punitive.

Franklin said it would receive less than 1 percent of its $30.5 million unsecured claim in the case, now before the U.S. Bankruptcy Appellate Panel of the Ninth Circuit.

The brief claimed that by confirming a plan providing such a small distribution, compared with recoveries of 52 percent to 100 percent for other unsecured claims, U.S. Bankruptcy Judge Christopher Klein erred in backing Stockton’s exit plan. …

The Franklin team argued that Stockton would leave its two funds with little while leaving the city’s pension fund, the California Public Employees’ Retirement System, untouched.

CalPERS also made whole in San Bernardino

San Bernardino’s bankruptcy saga has key similarities. More from Reuters:

The bankrupt California city of San Bernardino revealed on Thursday details of its deal with the state’s public pension system CalPERS, in which the retirement fund will be paid in full under the city’s bankruptcy exit plan.

San Bernardino announced last year it intended to pay the powerful California Public Employees’ Retirement System in full under its bankruptcy plan, while cutting its bondholder debt. …

The CalPERS deal has angered other creditors, including holders of $50 million in pension obligation bonds, who face cuts to their debt. They are suing the city over the CalPERS deal. …

Luxembourg-based EEPK, holders of the pension bonds, and Ambac Assurance Corp, which insures a portion of them, sued San Bernardino in January, claiming the bonds are part of a single pension obligation, so that any payment to CalPERS requires equivalent payment to the bondholders.

Initial arguments on that lawsuit will be heard on May 11.

Bond companies likely to be wary of struggling cities

Analysts said this disparate treatment was likely to make bond companies — and Wall Street in general — wary of dealing with financially stressed cities in California.

CalPERS appears to have something of a home-court advantage in dealing with bankrupt cities. As attorneys for Franklin Templeton have laid out, bankruptcy laws generally are structured to ensure “everyone takes a haircut” in recovery plans.

That’s not happening in Stockton and San Bernardino — so far, at least.