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Michigan Governor Rick Snyder (R) said that investors holding $1.5 billion of bonds from Detroit’s distressed schools would be fully repaid under a plan by the state to split the system in two, Bloomberg News reported on Friday. The proposal, which passed the state Senate last month, establishes a new district responsible for educating students and running the schools, while the existing district’s only task is to collect taxes and repay all obligations except pensions. Moody’s Investors Service said in a report on Thursday that while the plan could be “a significantly positive event for bondholders,” the split doesn’t mean a default or bankruptcy is off the table. Detroit’s school district is reeling from the same population decline that pushed the city into the largest U.S. municipal bankruptcy. The system, which has seen enrollment drop by nearly 100,000 students in the past decade, is overseen by Emergency Manager Steven Rhodes, the judge in Detroit’s chapter 9 proceedings. Moody’s gives it an issuer rating of Caa1, the fifth-lowest rank. Snyder last week signed an emergency funding measure for the schools, which would send $48.7 million to the district to keep doors open through the end of the school year. The Senate passed a $720 million bill that would break the system into two last month. Read more. 

Can a financially distressed government unit restructure its pension obligations over retiree objections? Prof. Amy Monahan of the University of Minnesota Law School joins ABI Resident Scholar Melissa Jacoby to explore this difficult topic on an ABI Podcast. 

The impact of public pension debt on the economy will be the focus of a special "Eye on Bankruptcy" panel before a live audience on April 16 at ABI's Annual Spring Meeting in Washington, D.C. Register today! 

The Federal Reserve on Friday released final rule changes to treat more municipal securities as high-quality liquid assets (HQLA) under liquidity requirements for large financial institutions, but critics complain they do not go far enough and could hurt the muni market, Bond Buyer reported on Friday. The rule changes will take effect on July 1, 2016, but other banking regulators still exclude munis as HQLA. "Unfortunately, [the rule changes] will continue to discourage investment in our local communities. And, it will do little, if anything, to help cash-strapped school districts and municipalities finance critical infrastructure projects," said Rep. Luke Messer (R-Ind.), sponsor of a bill approved by the House in November that would go further than the Fed. The final rule changes are slightly more lenient than those proposed last May after municipal market participants protested the liquidity rules adopted by the Fed, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. in September 2014 that excluded munis as HQLA because of concerns they were not liquid or readily marketable and could not be converted to cash during periods of financial stress.

Assured Guaranty Ltd. is seeking financial information from Puerto Rico, and is looking to Washington, D.C., for help, Bloomberg News reported yesterday. The bond insurer, which guarantees repayment on about $3.8 billion of commonwealth securities, sent a letter on Wednesday addressed to Cleary Gottlieb Steen & Hamilton LLP, which is representing Puerto Rico in its attempt to restructure $70 billion of debt, detailing multiple requests for information. The letter signed by Bruce Stern, Assured’s executive officer, was also sent to U.S. Treasury Secretary Jacob J. Lew, House Speaker Paul Ryan and other federal lawmakers working on legislation to address the island’s fiscal crisis. Assured says that it has failed to receive complete financial information that it is entitled to as insurer of commonwealth securities after repeated appeals during the last 18 months, beginning with a request for Puerto Rico Highways & Transportation Authority maintenance agreements in September 2014. Assured is also seeking current balances for accounts that repay Highways debt and Puerto Rico Convention Center District Authority bonds after the two agencies began using reserve funds to make their Jan. 1 debt-service payments. Assured needs the data to plan for possible draws on its insurance policies, Stern wrote in the letter.

ABI Resident Scholar Prof. Melissa Jacoby speaks with Prof. Charles Tabb, the Mildred Van Voorhis Jones Chair in Law at the University of Illinois College of Law, about his article prepared for the ABI-Illinois Symposium on Chapter 11 Reform in 2014 titled "The Bankruptcy Clause, the Fifth Amendment, and the Limited Rights of Secured Creditors in Bankruptcy." Tabb, ABI's Spring 2014 Resident Scholar, applies his research on bankruptcy and the Fifth Amendment's "takings" clause to current legislative proposals for remedying Puerto Rico's debt crisis. Click here to listen. 

For more news and analysis on Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.

The city of San Bernardino reached a settlement in its municipal bankruptcy on Tuesday that gives pension bondholders a 60 percent haircut, Reuters reported yesterday. The deal reduces the city's payments to pension bondholders by $45 million. The payments will be made over 30 years, starting one year after San Bernardino's chapter 9 plan is confirmed, according to the city. "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. San Bernardino declared bankruptcy in 2012 with a $45 million deficit. Along with Detroit and Stockton, its bankruptcy has been closely watched by the $3.6 trillion U.S. municipal bond market.

The bankrupt city of Hillview, Ky., said it plans to raise taxes and borrow $5 million to pay off a newly reached settlement in a decade-old property dispute with a truck-driver training school, the Wall Street Journal reported today. Officials for the Louisville suburb said in court papers yesterday that they reached a deal to pay a portion of the $15 million judgment owed to Truck America Training LLC. The legal award, which grew by $3,759.54 a day in interest, prompted Hillview leaders to put the 9,000-resident city into bankruptcy proceedings in August. Under the deal, Hillview officials will make an up-front payment of $5 million that it plans to raise by issuing municipal bonds. City officials will also turn over 8.3 percent of its general fund revenue, minus a few deductions, to the training school for 20 years, according a copy of the settlement filed in U.S. Bankruptcy Court in Louisville. The deal still needs approval from Judge Alan C. Stout, who agreed to evaluate it at a hearing on today. Court approval would enable Hillview to drop its bankruptcy case.

Puerto Rico’s Government Development Bank, whose regulator says faces a cash shortfall of as much as $1.3 billion in June, will continue to operate on its own — for now, Bloomberg News reported yesterday. The bank, which lends to the commonwealth and its municipalities, is insolvent, Puerto Rico’s Commission of Financial Institutions, the bank’s regulator, concluded in its most recent report on the GDB’s finances. That determination allows the island’s Treasury Secretary to ask a court to appoint a receiver to oversee the GDB. It’s a move the administration won’t make at this time, Jesus Manuel Ortiz, a spokesman for Governor Alejandro Garcia Padilla, told reporters yesterday in San Juan. “We are constantly monitoring the liquidity of the GDB and no receiver will be named in the short term,” Ortiz said. Read more. 

The House Natural Resources Committee has released draft legislation — with the acroynym PROMESA — in response to Puerto Rico's financial crisis and Speaker Ryan's call for action. ABI Resident Scholar Prof. Melissa Jacoby details PROMESA's restructuring provisions for Puerto Rico in a CreditSlips blog post. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

House Republicans released a draft of a rescue plan for Puerto Rico yesterday that they hoped could quickly garner bipartisan support and win over skeptics on the island, on Wall Street and in Congress, the New York Times reported today. The plan, being drafted by Republicans on the House Natural Resources Committee, in consultation with Democrats in Congress and the Treasury Department, calls for putting Puerto Rico’s finances under a presidentially appointed oversight board — a bitter pill to many on the island. The plan would also establish guidelines for restructuring some portion of Puerto Rico’s $72 billion of debt, “where necessary.” While Puerto Rico would not be granted standing to seek relief in bankruptcy — something its leaders wanted — it could get some of the legal tools found in bankruptcy as long as it first jumps through a number of hoops. To some on the island, any federal oversight board at all is a deal-breaker. Shortly after a summary of the committee’s approach began to circulate late last week, the governor of Puerto Rico, Alejandro García Padilla, denounced it as “shameful and degrading,” and something that would deprive the island “of its own government.” The president of the Puerto Rican Senate, Eduardo Bhatia, said upon reading the proposal that he was deeply offended by the way it was written, which he said “was from the 18th century,” evoking “the worst colonial subjugations.” Read more. 

In related news, some of Puerto Rico’s largest creditors, unsatisfied with a commonwealth debt-reorganization proposal and the direction of congressional legislation, are working together to draft their own restructuring plan, Bloomberg News reported yesterday. Representatives of bondholder groups and bond insurance companies met on Monday at the New York office of PJT Partners Inc., which is advising MBIA’s National Public Finance Guarantee Corp., to begin crafting a plan that would reduce Puerto Rico’s $70 billion in obligations. The commonwealth last week gave its creditors a revised restructuring proposal, which the people say includes losses that are larger than they’re willing to accept. The advisers and lawyers for traditional municipal-bond investors, hedge funds and insurers met as U.S. lawmakers move closer to legislation. The House Natural Resources Committee yesterday made public a discussion draft of a bill that would establish a control board to oversee Puerto Rico’s debt restructuring and annual budgets. It’s the most comprehensive legislation yet advanced by congressional Republicans to help address the island’s finances. Read more. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.

by Bill Rochelle, ABI Editor at Large

By permanently enjoining Puerto Rico’s minimum alternative corporate income tax, a federal district judge underscored the urgency for the Supreme Court or Congress to give the island access to chapter 9 municipal bankruptcy. The tax, referred to as the AMT, was aimed at Wal-Mart Puerto Rico Inc., the largest private employer and largest retail taxpayer in Puerto Rico. District Judge Jose Antonio Fuste in Puerto Rico held in his March 28 opinion that Wal-Mart has no prayer of ever obtaining a refund of the AMT because the commonwealth “is insolvent and no longer able to pay its debts as they come due.” Puerto Rico’s legislature enacted the AMT in May 2015 in 12 days. In his 109-page opinion written after a four-day trial in early February, Judge Fuste concluded that the AMT “is a legislative money grab pure and simple.” Read more. 

In related news, Puerto Rico Governor Alejandro Garcia Padilla welcomed proposed federal legislation that would help the island restructure its $70 billion of debt, while saying that it imposes too much U.S. control over the commonwealth, Bloomberg News reported today. A draft measure by House Republicans that has circulated on Capitol Hill would give a federal control board the legal authority to oversee a reduction of the island’s debts, instead of entrusting that power to local officials. The board would have the ability to cut the budget if Puerto Rico lawmakers are unable to erase the chronic deficits that are at the root of the fiscal crisis -- a step that would take key decisions away from the island’s legislature and governor. “The section on restructuring the debt is positive, but the price is too high,” Garcia Padilla told reporters Monday in San Juan. Read more. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

Congress will soon decide whether to shield cash-strapped Puerto Rico from investor lawsuits while the island maps a plan to resolve its financial crisis — an intervention that could divide some lawmakers and creditors, Reuters reported on Saturday. Republican leaders who control Congress are due within days to outline a Puerto Rico rescue plan that would restructure its $70 billion debt outside bankruptcy and confront a 45 percent poverty rate and a looming health crisis as the Zika virus spreads. Republican leaders agree with the Obama administration that an independent review board should mediate disputes between creditors and Puerto Rico officials, but lawmakers disagree over whether investors must put lawsuits on hold in the meantime. "I think we need to keep the pressure up," said Rep. Jeff Duncan (R-S.C.), who opposes a freeze, or stay, on litigation. "I would not be for allowing a stay," said Duncan, who has a vote on the Natural Resources Committee that is drafting a rescue plan. Republicans insist the Puerto Rico rescue is anything but a bankruptcy. Opening the door to a Puerto Rico bankruptcy would be "ill-conceived and would undermine the rule of law" Republicans argue in a written outline of the Puerto Rico rescue plan seen by Reuters on Friday. But while a stay on litigation "is a highly complex and sensitive component" of rescue, the hold on lawsuits is necessary, according to the outline, which envisions a five-member oversight board auditing Puerto Rico's finances and helping mediate creditor disputes. Read more. 

In related news, House Speaker Paul Ryan promised that House Republicans would have a plan to help Puerto Rico deal with its $70 billion debt by the end of March, yet some island officials are finding the emerging draft difficult to swallow, Bloomberg News reported yesterday. The bill being written would create a five-member board that will hire experts to oversee a process for Puerto Rico to restructure its debts, which threaten to cripple the commonwealth’s finances this spring. For Puerto Rico Governor Alejandro Garcia Padilla and other island officials, handing over financial control to a federally appointed panel will be difficult. Pedro Pierluisi, Puerto Rico’s Democratic delegate in Congress, is already raising concerns, saying he has several remaining conditions. “If they are not met, the bill will not become law,” Pierluisi said in a statement on Saturday. “And, if a bill does not become law, Puerto Rico and its creditors will almost certainly go over a cliff — together — this summer.” Still, he couched his conditions with an insistence he can work to make modifications with his Republican and Democratic colleagues “to create a final product that is a net positive for the people of Puerto Rico.” Read more. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.