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GO Bond Debt: Is It as Golden as You Think?

| Nov 23, 2022 | Bankruptcy, Debt, Business, Debt

By: Laura Day DelCotto

The year end news is full of the repercussions of the interest rate increases for everyone, including issuers of municipal bonds. Municipal debt is never immune from the private sector market forces.

I am sometimes frustrated by the general unwillingness to even discuss the possibilities around using bankruptcy as a legal, financial and business strategy. Congress created these tools centuries ago and modifies the tools periodically. Municipal bankruptcy – chapter 9 – is the rarest of all, but it was created so it can be used when necessary.

What Is General Obligation Debt?

General obligation municipal bonds are still considered by many to be one of the safest investments next to US Treasuries, since they are backed by the “full faith and credit” of the issuing municipal entity. This means, in contrast to revenue bonds, they are to be repaid from the general taxing power of the municipality.

Can GO Debt Be Modified in a Bankruptcy?

The caselaw for chapter 9 filings is often older, so there is more uncertainty regarding what will happen in any specific chapter 9 case in this day and time. There are several decided cases which hold that GO Bonds do not need to be repaid in full in order to confirm a chapter 9 rehabilitation plan. These include In re City of Camp Wood, Texas, Case No. 5:05-BK-54480 ( Bankr. W.D. TX 2007)(unpbls.)( plan allowed write-down of principal and interest rate on GO bonds, and amortization of repayments over longer time period); In re Sanitary & Improvement Dist. No. 7, 98 B.R. 970, 974 (Bankr. D. Neb. 1989)(court refused to force city to raise taxes to cover 100% of bond debt, stating that “if a municipality were required to pay prepetition bondholders the full amount of their claim with interest… and the [debtor] had no ability to impar the bondholder claims over objection, the whole purpose to Chapter 9 would be of little value.”); and In re City of Columbus Falls, Montana Special Impr. Dist. No. 25,26 and 28, 143 B.R. 750 (D. Mont. 1992)(permitting plan allowing debtor to impair GO bondholders so long as other chapter 9 requirements were met).

Chapter 9 Filings

My experience has been that the “bond lawyer” bar and the “bankruptcy” bar do not speak anywhere near the same language on these issues. The issuing agencies and lawyers will always tell leadership that the world will come to an end but that is not the case. Most municipalities and quasi-governmental entities end up with some kind of consensual settlement, leading to emerging with a stronger ability to continue to provide for the health, safety and welfare of its citizens and other constituencies. DelCotto Law is experienced in chapter 9 filings in Kentucky. Make sure you contact an attorney who has specific chapter 9 experience, not other types of bankruptcy cases. They are very different in both substance and process.

About DelCotto Law Group

DelCotto Law Group is Kentucky’s business preservation law firm known for its commitment to the lifetime success of its clients. DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.