Katyal told the First Circuit that the bondholders are entitled to relief from the bankruptcy, namely an automatic stay, as long as they have a “colorable” claim to a secured property interest. Moody’s has already downgraded both Illinois highway bonds and Cleveland water bonds as a result of the lower court’s ruling, SIFMA said, adding that the ruling “risks shoving the municipal revenue bond market off the precipice on which it is balanced - with issuers paying the price.” As a result, bond buyers would stop accepting lower interest rates for them and borrowing costs for municipalities across the country would go sky-high.

Represented by Faegre Drinker Biddle & Reath, the association argued that allowing the Puerto Rico agencies to get away with such trickery would mean that revenue bonds would be no safer for bond buyers that general-obligation bonds. This was a “bait and switch,” according to an amicus brief filed by the Securities Industry and Financial Markets Association. And since the funds were nearly empty, the bondholders were out of luck. Ultimately a federal judge ruled that the bondholders didn’t have the security interest in the revenue streams that they thought they had but rather a security interest in the trust funds - a decision that shocked the bond market. When the Puerto Rico agencies that issued the bonds defaulted, the insurers for the bondholders tried to collect from the trust funds, only to discover that the government had been diverting the money away. In both cases the revenues were supposed to be paid into a trust fund that protected the bondholders’ interests. One of the cases that the First Circuit tackled Thursday turns on $3 billion in bonds backed by Puerto Rico highway tolls and excise taxes the other, $800 million in debt secured by taxes on rum paid to Puerto Rico by the federal government. municipal bonds are revenue bonds, representing some $2.68 trillion in outstanding debt. The cases involve so-called “revenue bonds,” which are cheaper for municipalities to issue than traditional general-obligation bonds because they’re backed by a specific revenue stream. “I wouldn’t lend someone $3,000 on those terms, let alone $3 billion,” he said.Īnother attorney, Milbank’s Atara Miller argued that Puerto Rico’s stance leaves the bondholders with “an umbrella that we can only use on sunny days.” solicitor general in the first term of President Obama. Puerto Rico’s claim “makes no sense,” added Katyal, a partner at Hogan Lovells who was U.S. “But even the most fly-by-night payday lenders know that if there’s no collateral, the interest rates have to go through the roof.” “They are asking you to believe that the bondholders lent billions of dollars with no security interest,” their lawyer, Neal Katyal, told the court in Boston on Thursday. Puerto Rico and other parties that want the money claim the security interest of the bondholders is worthless, despite the common industry assumption that similar bonds are backed by an underlying revenue stream. BOSTON (CN) - In a pair of cases that could send shockwaves through the multitrillion-dollar municipal bond market and dramatically increase borrowing costs for governments at all levels, the First Circuit heard arguments Thursday on whether Puerto Rico bondholders could collect on collateral for almost $4 billion worth of defaulted loans.

Municipal bond defaults