Insolvency Laws Affecting the Municipal Market and the Roles of the Buy-Side Analyst in Distressed Situations

There has been much press attention about Chapter 9 municipal bankruptcies in recent years, However, Chapter 9 proceedings are only one possible insolvency situation facing the municipal markets and cover only a portion of the borrowers in the municipal market. Distressed municipalities that are not permitted to file Chapter 9 bankruptcy may find themselves in state court receiverships, conservatorships, and the like, with great uncertainty on outcomes and available bondholder rights. Likewise, distressed nongovernmental borrowers in the municipal market are not only eligible to file under Chapters 7 or 11 bankruptcy cases, but may also use state court receiverships, creditor assignments, etc., to adjust their debt, or simply go out of business. The authors address the differences in municipal insolvency proceedings that are relevant to municipal analysts and highlight the many roles a municipal analyst can play in managing the buy-side aspects of a municipal workout and insolvency (e.g., protect the value of the trust estate, anticipate potential recovery outcomes, understand the different treatment of municipal bondholder claims) and also note some practical concerns caused by participating in the workout process. The authors also explore the special issues faced by special purpose districts and developer insolvencies, concentrating on current bondholder issues in the community development district market in Florida.