Chapter 9 Past May Not Be Prologue: Priority Uncertain For Bondholders

The Bond Buyer reports:

As municipalities confront unprecedented budget shortfalls in the aftermath of the Great Recession, some analysts are questioning whether the history of prioritizing bondholders during bankruptcy proceedings will be of much help in gauging future outcomes.

As positive as that history has been, critics say, the data set of municipal bankruptcies is too small to have any meaning relative to the vast variety of issuers in the muni marketplace.

Just three major issuers and 250 municipalities in total have filed for Chapter 9 protection in the last 30 years, according to data compiled by bankruptcy expert James Spiotto of Chapman & Cutler. The majority of cases were for small special-tax districts and entities that did not issue municipal bonds.

Of those that did, most borrowed for nonessential services, like railroad stations without an accompanying railroad. Or they went bankrupt as a result of ­mismanagement, financial calamity or fraud.

Something to think about before you invest your hard earned money.