02.04.14

Heading towards the Checkered Flag. As the Motor City is revving up for what it hopes to be its final lap, the city has requested that the U.S. Bankruptcy Court dissolve a committee set up by a trustee to represent unsecured creditors that the Trustee believes is required by federal law. The committee, which was set up last December by the U.S. Trustee in the wake of U.S. Bankruptcy Judge Steven Rhodes’s decision finding the Motor City eligible for federal bankruptcy protection, is composed of bond insurer Financial Guaranty Insurance Co., the city’s two pension funds, the Wilmington Trust Company, which is the trustee for the city’s pension certificates, and a tort lawyer. Motor City attorneys have advised the court that the creditors on the committee are already well represented in the case, so that the committee might end up doing more to hinder than to help resolve the precedent-setting chapter 9 municipal bankruptcy: “The city interacts with these parties on virtually a daily basis…Thus the appointment of these parties to the creditors’ committee — the purpose of which is to provide representation for otherwise unrepresented unsecured creditors — is wholly unnecessary….The city believes that the appointment of the creditors’ committee comprised largely of parties already participating in mediation will not advance, and may well disrupt, the mediation…The risk is particularly significant where four of the five creditors’ committee members already are participating in mediation, with their own counsel, to advocate their individual interests.

The Odor of Pay to Play. In Jefferson County, Alabama, which emerged from municipal bankruptcy last December, and where the terms “SEC” and “pay-to-play” can have multiple connotations, ranging from the Southeast Conference for college sports to the Securities and Exchange Commission, and where “Pay-to-Play” can create similar confusion whether it be for football and basketball players in the SEC or some of the pay-to-play corruption which was at the heart of the county’s municipal bankruptcy, such as by former county commissioner Larry Langford, who is serving 15 years on pay-to-play charges. To date, more than 20 contractors, county employees, elected officials and those participating in the financings have been indicted or pled guilty to crimes. Even though the County is now out of municipal bankruptcy, the stench from the sewer-related financing deals lingers as two former JPMorgan bankers are pushing to exclude different expert witnesses in a pay-to-play federal suit involving the county’s sewer deals in the case brought by the Securities & Exchange Commission alleging that Charles LeCroy and Douglas MacFaddin arranged $8.2 million in payments to friends of certain county commissioners and local broker-dealers who had no official role when more than $3.2 billion of sewer refunding warrants were issued in 2002 and 2003. According to the SEC, the alleged payments were made to ensure that JPMorgan would win bond underwriting and swap business from the county, the SEC has charged. One of the experts JPMorgan is seeking to exclude, Robin Kole, a former municipal banker and muni derivatives market specialist, had written a 14-page report that said the former bankers and JPMorgan disclosed the payments in accordance with prevailing standards, customs, and practices in the municipal swap market in 2002 and 2003. She concluded that there were no strict disclosure guidelines for swaps, which certain county officials received letters about the swap transactions, that those who received payments were advisors to the county, and the payments were only in connection with the swaps. Ms. Kole’s report also said that “disclosure guidelines in the municipal bond market during the relevant time period would have applied only to municipal securities and not to municipal interest rate swaps.” Nevertheless, the non-football SEC charges that “substantial evidence” demonstrates payments were made as part of the bond transactions, not just the swaps. While discovery is proceeding in the five-year-old case, U.S. Judge Abdul Kallon has not yet set a trial date, because JPMorgan has, so far, been unable to depose CDR Financial Products Inc. senior vice president Douglas Goldberg, who has already pled guilty to a conspiracy to rig bids for municipal bond investment contracts. Judge Kallon has refused to allow Mr. Goldberg to be deposed until after his sentencing, currently set for March 20. CDR was Jefferson County’s swap adviser during the time it issued warrants and entered derivatives to rebuild an aging sewer system under a federal consent decree. Former senior Republican leaders in the U.S. House Financial Services Committee and elected leaders in Jefferson County believe the swaps were the linchpin to plunging the county into what at the time was the largest municipal bankruptcy in history. Jefferson County filed for bankruptcy in November 2011 and exited Dec. 2, 2013 after selling refunding warrants to write down the 2002 and 2003 sewer warrants.

Is There a Smoking Chimney? As Pennsylvania’s capitol city of Harrisburg awaits approval from the Commonwealth Court of Pennsylvania  to exit from state receivership—the alternate route the city chose to filing for federal municipal bankruptcy—in the wake of the court’s  approval last September of  the Harrisburg Strong recovery plan, a plan which hinged upon the sale of the incinerator to the Lancaster County Solid Waste Management Authority and a long-term lease of parking assets from the city and the Harrisburg Parking Authority to the Pennsylvania Economic Development Financing Authority, Moody’ yesterday reported that contingent liabilities for nonessential, noncore enterprises can pose significant credit risks for local governments. Author Josellyn Yousef wrote: “Only a small percentage of local governments take on contingent liabilities for nonessential enterprises. But for those that do, the effects on those governments’ credit quality can be devastating.” The so-called smoking gun in Harrisburg involved the municipality’s guarantee of $310 million of debt on its incinerator, where the escalating financing costs for the incinerator were a critical factor in pushing the city towards insolvency. According to the report, such municipal enterprises are much riskier than general government and essential public services, because of their limited abilities to increase revenue in a competitive market environment—noting that the Great Recession increased the propensity of some such municipalities to guarantee the debt of what the report terms “nonessential enterprises,” such as sports and entertainment facilities, nursing homes, real estate developments, and fiber-optic telecommunications systems. The rating agency reports it evaluates the credit risk from contingent liabilities through examining three drivers: the likelihood of the enterprise’s need for financial support, the municipality’s financial capacity to cover the debt service, and the municipality’s willingness to meet contingent obligations.

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