By: Mark Glennon*

Most readers’ eyes surely will glaze over a piece in The Bond Buyer today —
Why Puerto Rico Highways Ruling Has Wide Ramifications. But have no doubt it’s a matter that will be paramount, sooner or later, for Chicago and many other Illinois municipalities, and perhaps for the state itself.

In the Puerto Rico case, a U.S. bankruptcy judge basically invalidated a lien — a mortgage — securing bondholders with public assets. Here in Illinois, the municipal bond industry has been quietly putting language into Illinois statutes to try to avoid the same result. If successful, for municipalities that go bankrupt, those efforts would be disastrous for taxpayers and government services. An assetless bankruptcy would result, meaning there’s nothing to work with and no hope of a fresh start.

In the near term, however, borrowing costs may increase as a result of the ruling. That’s because bond buyers today aren’t focusing much on general creditworthiness. Instead, they are looking at what assets are mortgaged to secure the bonds and whether the mortgage will hold up legally in bankruptcy. The ruling might make them feel less secure.

We’ve written about this issue in articles linked here, here, here, here and here.

The muni bond industry has mostly had its way in the Illinois General Assembly. Mercifully, however, Gov. Rauner vetoed its most recent attempt to overcome the issue in a bill for the RTA and CTA.

The muni bond industry and Wall Street are acutely aware of the issue, though the Illinois press is asleep.

“Without a doubt … this is a victory for the Oversight Board’s continuous effort to destroy all bondholder liens in Puerto Rico,” said one attorney about the Puerto Rico ruling.

That’s what Illinois and its broke municipalities should be positioning themselves for. Instead, we’re doing the opposite — turning over public assets to bondholders to secure more borrowing.

Chicago, in particular, is moving towards using its new statutory authority to convey ownership of future income to bondholders for additional borrowing, as described here in an earlier Bond Buyer article.

UPDATE 9/15/17: Be aware that the Puerto Rico ruling was only on a motion for a preliminary injunction. A full ruling on the merits is yet to come. Legislation recently passed in Illinois providing for transfer of ownership of future income, on which Chicago intends to rely for that upcoming bond offering, presumably was drafted to avoid the result in the Puerto Rico ruling — that is, to ensure the bondholders win. For those interested in the legal details of the decision, linked here is a piece by Chapman & Cutler about it.

Mark Glennon is founder of Wirepoints. Opinions expressed are his own.

 

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