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Revenue stream usually covers enterprise bonds
7/5/2012In your article, “Most Stockton Bondholders Unaffected by Bankruptcy,” you referred to “enterprise bonds.” If there’s a shortfall in the dedicated revenue stream of these bonds, who covers it?
- P.O., FloridaEnterprise fund securities, which are popularly referred to as “revenue bonds,” are expected to be self supporting from the stream of income generated by the use or sale of the "product" of the enterprise. In the case of Stockton, enterprise bonds were issued by the water and wastewater systems, so revenues from either water sales or wastewater treatment are used to pay the bonds. Typically, there is ample coverage of debt service by the revenue stream in this sector to meet debt service without the need for a backup security pledge, so these bonds are not expected to need further support.
Stockton’s enterprise bonds were, for the most part, sold with bond insurance (or a bank Letter of Credit), which provided an extra degree of comfort for bondholders. In the event of a shortfall, the bond insurer would cover it. For uninsured bonds, there is no further recourse.
Is general obligation debt the most secure?
7/5/2012I've always been under the impression that general fund obligations are a city’s most secure debt. But in your article, “Most Stockton Bondholders Unaffected by Bankruptcy,” you say the city will continue to pay enterprise bonds backed by water and sewer revenues and debt secured by special assessments and special taxes. I’m confused; which bonds are more secure?
- D.W., CaliforniaUnder Chapter 9 of the bankruptcy code, enterprise and other self- supporting debt (like water and sewer, or tax allocation bonds) are considered "special revenue" bonds since they are secured by an identifiable, dedicated source of revenues outside of the general fund. As such, bankruptcy courts usually allow such bonds to be paid despite the bankrupt condition of the city or county government. This is the case since general taxes or other general fund resources are not required for repayment.
Under Chapter 9, general obligation and other general fund-backed debt is considered unsecured, and is subject to the plan of adjustment developed by the debtor and the court. Bondholders secured by general fund revenues must compete in bankruptcy court with other general fund creditors.
Of the thousands of units of local government in this country, few communities have ever declared bankruptcy. For the rest, general obligation debt is normally viewed as having the broadest pledge a city/county can offer.
City of Boston is strong
7/5/2012I heard that Boston, MA, will file bankruptcy? Is this true?
- M.M., MissouriBoston's general obligation bond ratings are “Aaa/AA+” and the city exhibits a strong financial position and a broad and diverse economy. There is no evidence to support Boston, MA, entering bankruptcy. I believe any report otherwise is factually incorrect.
This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.