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(snip)But, but, munis always pay back almost 100 cents on the dollar, even in bankruptcy, right? Wrong. Bankrupt Vallejo [ California - sic ] just filed a POR to pay back unsecured creditors between 5 and 20 cents. "The city regrets that it cannot pay a higher percentage,” Vallejo officials said in the court filings. “The city lacks the revenues to do so while maintaining an adequate level of municipal services, such as the provision of fire and police protection and the repairing of the city’s streets." Just wait for the reaction when holders of unsecured debt all those other (hundreds of) insolvent cities, towns, and states realize that a 5 cent recovery is all too possible...

And now for the bad news, from Bond Buyer:

Unsecured creditors will receive 5 cents to 20 cents on the dollar for their claims under a reorganization plan Vallejo, Calif., filed Tuesday in federal court.

The plan to exit bankruptcy outlines the reorganization of debt the city owes its largest creditors, Union Bank and National Public Finance Guarantee. It also sets aside a pool of $6 million to pay unsecured creditors about 5% to 20% of their claims over two years, according to court documents filed in U.S. Bankruptcy Court for the Eastern District in Sacramento.

The formal legal plan is based on a five-year road map City Council members approved at the end of November, tackling $195 million in unfunded city pension obligations, cutting payments for retiree health care, reducing pension benefits for new employees, raising pension contributions for current workers, and creating a rainy-day fund.

Union Bank, the largest creditor, is owed $50 million after holding letters of credit on four series of defaulted COPs. The filing indicates Union Bank will get a new “lease-leaseback” obligation in exchange for canceling the COP series. It will also get $6 million of unspent proceeds from the COPs held under trust agreements.

Union Bank is slated to get 40% less than what it would have received from the original COP scheduled payments, according to the Vallejo filing.

Vallejo’s exit strategy includes restructuring the debt owed to unsecured creditors, many of which are employees and retirees, by creating a $6 million pool of cash that will be paid out over two years. They will still be able to pursue one of the city’s insurance pools to settle the liabilities, according to the documents.



Vallejo is certainly not the last to file a plan of reorg that attributes its GUCs [ ~ owners of muni bonds - sic ] nuisance value. We wonder when these same GUCs realize they are nothing but a nuisance: today the MUB [ muni bond fund index - sic ] actually closed up.(snip)


Keep in mind that, with states like California increasing tax rates on investment income, and with ObamaCare set to also increase tax rates on investment income at the US federal level, the arguable 'last refuge' of rich Californians to escape actually having to pay draconian tax rates was the purchase of federal + state + local tax free municipal bonds. However, if $100,000 invested in such a muni bond has any probability of turning into $5,000-$20,000 as is the case with owners of Vallejo bonds, rich Californians will obviously start 'running for the exit'. This will obviously include selling off the risky muni bonds they already own ... but it is also likely to mean crossing the state line / US border with some portion of their investment money at least.