Bondholders Seen Bearing Brunt of San Bernardino Bankruptcy

November 20, 2014 – In The News
The Bond Buyer

Michael Sweet was quoted in The Bond Buyer article, “Bondholders Seen Bearing Brunt of San Bernardino Bankruptcy.” Full text can be found in the November 20, 2014, issue, but a synopsis is below.

If San Bernardino doesn't drastically change course before filing a bankruptcy plan of adjustment next May, its bondholders may be the ones bearing the brunt of the financial pain from its Chapter 9 filing.

In both Stockton and Detroit, judges affirmed the theoretical ability to impair pensions in a municipal bankruptcy. However, pensions remained untouched in Stockton and were barely touched in Detroit, where many bonds took large haircuts.

Despite the rulings in those two cases, the discussion on whether pensions can be impaired in municipal bankruptcy is far from over, said Fox attorney, Michael Sweet.

San Bernardino received clearance to release limited details about the interim agreement with CalPERS prior to the November 18, 2014, hearing. The city and CalPERS agreed on a September 1, 2015, for a plan of adjustment deadline. The plan will not impair the city's obligations to CalPERS, and the city will not reject the city's relationship with CalPERS.

Sweet explained that he found the idea that CalPERS would make any concessions surprising given its sabre-rattling and the strong positions the pension fund was taking in the early days of the Stockton bankruptcy filing in July 2012.

Sweet also noted that it behooves the city to meet the deadline set by the judge, because the only recourse she has in municipal bankruptcy would be to dismiss the case. In Chapter 11, the creditors can propose alternative plans of adjustments, but that isn't an option in municipal bankruptcy.