...And bondholders are going to get screwed.
For the benefit of those w/o a subscription here is a summary of where things look to be heading.
* Pensioners are being treated as having first claim on the territory's
resources, ahead of bond holders. This appears to contradict PR's
constitution and laws.
* Under the current proposals, 61 percent of the retirees would keep
receiving their full pensions and none will receive less than 91.5%.
* Bond holders will receive no more than 64 cents on the dollar. Many will receive less.
* The board intends to declare bonds sold in 2012 and 2014 unconstitutional and effectively null and void.
* Bonds issued before 2012 will be honored at 64 cents on the dollar.
* Those issued in 2012 would be offered only 45 cents on the dollar. And
those issued in 2014 only 35 cents on the dollar in a take it, or leave
it and get nothing settlement offer.
* Lawsuits are expected to challenge the basis for the settlement. But
many bondholders are expected to take what they can, given that the
recent Detroit bankruptcy essentially followed the same pattern of
putting pensions ahead of bondholders.
Thoughts: If this goes through and survives the court challenges it's
going to send a signal that municipal bonds are nowhere near as safe as
hitherto believed. It will almost certainly encourage states in serious
fiscal trouble like Illinois to try the same thing. And my guess is the
bond market is going to have to recalibrate it's risk reward ratio for
municipal bonds. All of which means that municipal bonds at all but the
highest credit ratings, could take a hit in their market valuation. And that hit will also be felt
by those seeking to borrow money who are suddenly going to find that
their legal guarantees are being viewed with skepticism by potential
lenders demanding higher yields for their paper.
I doubt a single municipal pension plan in the country accounted for current life expectancies and rates of return.
ReplyDeleteSimilarly, long term care insurance.
ReplyDeleteBut, back to munis. They were quite popular for my Mom's generation, but after this, I won't touch them. High risk bonds are just that, high risk. It will be interesting to see how local governments come to terms with this. The Feds will just print more money.