By: Mark Glennon*
It’s dangerous, but get used to it. Many more Illinois towns and cities will follow.
Bridgeview, a junk-rated Chicago suburb, priced a new $47 million bond offering yesterday. It followed Chicago in using that new borrowing structure authorized by Springfield earlier this year: It sold its ownership in future sales tax revenue to a separate entity, which will hold that money to ensure repayment of the bonds. It’s an attempt to make sure that, even in bankruptcy, the bank — bondholders — gets paid no matter what the consequences. Details are in a Bond Buyer article linked here.)
I’ve written often here criticizing this new structure. It’s like selling your future income to the bank so they’ll give you another loan at an acceptable rate. It raises the risk that even bankruptcy can’t offer a fresh start to broke municipalities. The bank — bondholders — may own everything.
Bridgeview is desperate, but it’s not alone. It’s straddled with an impossible debt burden, largely due in its particular case to borrowing for a soccer stadium that hasn’t worked out. In a sane state, Chapter 9 bankruptcy would be authorized for municipalities and Bridgeview, like many other cities and towns across Illinois, would be considering that option. I emphasize “considering” because whether bankruptcy will help is always a fact-specific, case-by-case matter.
And among those facts is whether all major assets are mortgaged to the hilt in a manner that even a bankruptcy judge may not be able to undo. That’s where the state law authorizing the new borrowing structure is most troubling. If any home rule municipality wants to use its share of sales tax or other revenue that flows from the state as collateral it must use the new “full sale” structure. Worse, the state bound itself by statute not to try to undo the ownership position of bondholders. (See our earlier article linked here for details.)
Now, it’s not entirely clear that even the new structure will hold up in bankruptcy. (Interestingly, Bridgeview’s new bonds did not price as well as Chicago’s, as the Bond Buyer reported).
Still, it’s unquestionably true that the new structure makes it far more likely that bondholders will prevail and come ahead of other creditors, taxpayers and service recipients, even in bankruptcy.
To summarize, many other Illinois towns and cities will follow Bridgeview and Chicago. Instead of addressing their debt burden or reorganizing in bankruptcy, they will be doubling down with more borrowing that puts bondholders first and reduces chances for a fresh start.
The Bond Buyer, always polite and restrained, said some critics think the new borrowing structure “could be abused by borrowers that lack fiscal restraint.” I’d rather put it this way: This is nuts!
*Mark Glennon is founder and Executive Editor of Wirepoints. Opinions expressed are his own.