California passes on tweaking municipal bankruptcy law

Reuters News
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Posted: Aug 08, 2012 7:17 PM
California passes on tweaking municipal bankruptcy law

(Reuters) - California's legislature will not revise a state law intended to keep municipalities from seeking Chapter 9 bankruptcy protection, an aide to a top lawmaker said on Wednesday.

A bill proposing changes to the law has been shelved for the rest of the year as lawmakers focus on other matters, notably talks with Governor Jerry Brown on his package of proposed reforms for the state's public pensions.

"It won't move," said Mark Hedlund, an aide to Senate President pro Tempore Darrell Steinberg.

The bill proposed giving mediators more powers in talks between municipalities and their creditors, potentially putting obstacles in the way of Chapter 9 filings. Negotiations are required under the state's Chapter 9 law, approved after the city of Vallejo filed for bankruptcy in 2008.

Public employee unions, concerned about how their contracts could fare in Chapter 9 proceedings, backed the bill. City officials lobbied against it. Lawmakers have been reluctant to step into municipal bankruptcy matters with three California cities seeking Chapter 9 bankruptcy protection since late June.

Stockton, San Bernardino and Mammoth Lakes have filed for bankruptcy, moves that garnered national attention. Some in the municipal debt market are concerned the filings may encourage more municipalities in the most populous U.S. state to seek Chapter 9 protection.

Others say the filings are happenstance instead of the start of a trend for California's other 479 cities.

Mammoth Lakes' filing is the result of a legal judgment over a property development dispute the mountain resort town says it can't afford to pay. Stockton and San Bernardino, relatively large cities, have struggled for years with their finances due to high unemployment, local housing markets that imploded, plunging revenue and rising liabilities.

A Morgan Stanley report on Tuesday said problems faced by Stockton and San Bernardino have been extreme but noted their high costs and sharp revenue drops are not. That argues for muni investors to stick with revenue bonds and be pickier with general obligation debt, the report said: "We are averse to state and local credit, and we advocate increased selectivity in GOs."

Rick Ashburn at Creekside Partners in Lafayette, California is seizing on anxiety about muni bankruptcy in California. "Name association creates an opportunity," said Ashburn, noting his firm on Tuesday bought nonrated San Bernardino school district GOs that mature in 2017 with a 2.55 percent yield.

Bud Byrnes of RH Investment Corp in Los Angeles seized on Stockton's plodding toward bankruptcy earlier this year by picking up its community facility district debt. It matured this month with a 1 percent yield. "It was a pretty good play for six months," Byrnes said.

In the secondary market, the yield on top-rated 10-year bonds was unchanged at 1.75 percent from Tuesday while the 30-year yield rose 2 basis points to 2.93 percent on Municipal Market Data's benchmark triple-A scale.

In the primary market, the New York City Transitional Finance Authority upsized its highly rated tax-exempt subordinate bond issue to $1.05 billion from $850 million on solid demand. "People just need bonds, they need to put money to work," said Brian Steeves of Belle Haven Investments in White Plains, New York.

The Transitional Finance Authority said that retail buyers ordered $131 million of the $456 million of refunding and new money bonds during a two-day presale period.

In the formal pricing, yields were cut by one to five basis points for seven maturities in the tax-exempt fixed-rate offering, the authority said.

RBC Capital Markets won the 200 million of taxable debt that was sold with a true interest cost of 2.43 percent.

(Reporting by Jim Christie; additional reporting by Joan Gralla; Editing by James Dalgleish and M.D. Golan)