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In Texas, A Study In Contrast On Bondholder Defaults

By Mark Melin. Originally published at ValueWalk.

There have been nine health care bankruptcies thus far in 2017, but that doesn’t mean that bondholders are necessarily out of luck. In fact, a recent Moody’s report notes that bondholders can take a haircut when bankruptcy is not declared and remain whole even under bankruptcy conditions. Dallas County Schools provide a good example of this situation.

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Dallas County Schools lose $45 million and default on bonds, but don’t declare bankruptcy

Gainesville, Texas and Dallas are separated by 71.7 miles. The drive is a 1 hour and 52 minute straight shot down I-35, but they are worlds apart in terms of handing bond investors.

The Dallas County Schools (DCS) defaulted on its bond obligations in June and has not declared bankruptcy. Meanwhile, the Gainesville Hospital District has declared bankruptcy but has kept current with its bond obligations and continues to do so. The different approaches come as Moody’s previously noted an increase in overall municipal bond defaults.

The Dallas County School situation is complex and nuanced, as the system in question dates back to the point the county, not the city, administered the school district. The district is plagued with charges of mismanagement as school bus traffic tickets went unpaid amid charges that $45 million of district cash went missing amid what was categorized as “budgeting error.”

Moody’s had previously predicted the school district would be shut down as a result of the bond dispute.

The Dallas County School system is following the path of Jefferson County, Alabama and Harrisburg, PA in defaulting on portions of its debt without filing for bankruptcy. The political calculus is sticky for bondholders, Moody’s notes:

If DCS survives after the vote on dissolution this fall and remains in operation, its finances will remain challenged for two primary reasons. It has no flexibility to raise property taxes and its school bus stop-arm-camera enterprise will have difficulty generating revenues sufficient to cover annual debt service on promissory notes and other obligations. The shortfall will require additional transfers from the DCS general fund and heightens the potential the district may file for bankruptcy. On the other hand, if the district is dissolved, the current DCS tax levy will remain in place and should be more than sufficient to pay annual GOLT debt service. However, DCS would likely default on promissory notes again because it would not be generating revenue from operations, notably its stop-arm-camera initiative.

Gainsville, TX hospital outsources management as it restructures debt in bankruptcy while not missing bond payments

While the situation in Dallas has been generally confrontational with bondholders, the situation in Gainesville decidedly more friendly with less resistance coming from bondholders.

The North Texas Medical Center in Gainesville, which is owned by the Gainsville Hospital District, found itself in challenging financial straits. The medical facility serving a city of 16,000 as well as the surrounding 30-mile area filed for bankruptcy citing challenges in making payroll while facing potential closure of the hospital. Moody’s notes that when they filed, Gainesville had debts of near $3.1 million in unsecured trade payables, 70% of which were more than 30 days past due.

The district filed for Chapter 9 with the goal to obtain cash-flow relief with debtor-in-possession (DIP) financing so it could restructure its liabilities and continue operations. Because it stated and demonstrated a desire to remain current on its debt obligations, the plan was met with “very limited resistance from creditors and stakeholders,” the report noted, pointing out that Chapter 9 can be expensive for municipalities to the point costs outweigh benefits unless an amenable situation is found.

Because the region has a stable tax base and its services are vital to the region, financial arrangements were agreed upon. The hospital outsourced its management to a private operator and is negotiating on its debt load. Certain tax revenues have been determined by the Texas Attorney General to be “special revenues,” and thus not subject to litigation and collection efforts from unsecured creditors.

On August 21 the district will ask the bankruptcy court to confirm approximately $34.75 million in various non-GO liabilities, primarily pensions, as valid debts. Moody’s points out the district would refund these liabilities by issuing new GOLT bonds, using a 20-year amortization, which could result in a property tax rate increase 1% of assessed value. Even with this tax increase, there is significant “headroom” to raise taxes higher to meet obligations.

The post In Texas, A Study In Contrast On Bondholder Defaults appeared first on ValueWalk.

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