Franklin’s Weak Recovery Threatens Muni Market’s View of Lease Revenue Bonds

December 10, 2013 – In The News

Michael Sweet was quoted in the Debtwire article "Franklin’s Weak Recovery Threatens Muni Market’s View of Lease Revenue Bonds." While the full text can be found in the December 10, 2013, issue of Debtwire, a synopsis is noted below.

The possibility of an investment firm getting a recovery of less than one cent on the dollar in the Stockton, California bankruptcy case is impacting the way the market perceives lease revenue bonds, according to some credit analysts.

The city of Stockton has evoked a section of the bankruptcy code, which states that if a creditor is a lessor and its claim results from the termination of a lease of real property, the claim is capped at the greater of one year’s rent or 15 percent, not to exceed three years.

One alternative is to argue that the agreement is a secured financing agreement and not a true lease. A municipality cannot reject a secured financing agreement, only a true lease.

“The tension between a true lease and a financing agreement is not new. But it is probably a surprise for the muni world, as they thought they had a specific financial product and now they see something different,” said Michael Sweet.

“So in Stockton’s Chapter 9 case, we are going to see the interplay between the exotic products that Wall Street was selling to the cities and the Bankruptcy Code,” he said.