Gov. Tom Corbett's insistence that cash-strapped Harrisburg not seek federal bankruptcy protection, and the eventual drafting of a financial restructring plan that creditors seem able to live with, has made him a hero to municipal finance pros appalled by woebegone Detroit's Chapter 9 filing and the disruptive threat that bankruptcy poses to the muni industry. Both states may be run by Republicans; but Pennsylvania, unlike Michigan, takes care of its bondholders and the people paid to feed and service them.
At first glance, the Harrisburg reorganization plan posted by state-appointed receiver William Lynch looks tough on lenders: It leaves Dauphin County and its insurer, Assured Guaranty (AGM), receiving only around $210 million of the $300 million Harrisburg owes them for backing the bonds that funded the city's infamously money-losing trash incinerator, notes Tom Kozlik, boss muni bond analyst at Janney Capital Markets in Philadelphia.
So they're short $90 million - a 30% haircut. But not really: The county and insurer "will potentially receive further payment from future parking operations" and other sources baked into Lynch's "Harrisburg Strong Plan," pending final approval by Commonwealth Court and a few remaining creditors like the city firefighters' union, Kozlik notes.
Plus, the bondholders are insured. "The initial haircut to the major creditors is significant, but it is notable that agreement was achieved without the expensive and time consuming process of bankruptcy," Kozlik wrote in a report to clients. Most important, from his perspective, thanks to bond insurance (via AGM, and Ambac), "bondholders will emerge intact," with $400 million of city parking debt, as well as the incinerator debt, paying out.
The state's (and Gov. Corbett's) support for the receiver and opposition to a big messy Detroit-style bankruptcy "was key to reasonable agreements," Kozlik concluded. If it's upheld, "this plan will stand as a strong example of a collaborative approach to dealing with extreme municipal financial stress."
Another result: with a peaceful ending, no investment banker, adviser, lawyer or politician looks like going to prison -- and no investor has an incentive to demand retribution -- for driving the city so deep into debt for questionable projects in the first place.