Excerpt:
In the bankruptcy proceedings of the power utility, Swain sided with borrowers and concluded that special revenue bondholders do not hold a secured claim on current and future net revenues. As The Wall Street Journal explained in March, “A federal judge curbed Puerto Rico bondholders’ rights to the electric revenue generated by its public power utility.”
Furthermore, the ruling stated that the original legal obligation of the borrowers is not the face value of the debt, but rather what the borrower (in this case “PREPA”) can feasibly repay. This ruling raises concerns regarding its broader implications for the municipal bond market.
Municipal bonds play a pivotal role in financing vital infrastructure projects across America. However, Swain’s decision poses a significant threat to the traditional free-market principles that underpin the structure and security of municipal bonds, particularly special revenue bonds.
These bonds have provided investors with the assurance of repayment through revenue streams generated by specific projects or utilities. By eroding this sense of security, the ruling fundamentally alters the risk-reward dynamics of municipal bonds, disregarding the principles of free markets and limited-government intervention.
Consequently, state and local governments may encounter elevated borrowing costs when issuing bonds for necessary public investments, hindering fiscal responsibility and the efficient allocation of resources.
Author(s): Matthew Whitaker
Publication Date: 5 Sep 2023
Publication Site: Fox Business