Municipal Restructuring and Insolvency
Municipalities have been increasingly squeezed between the cost of providing basic services (which, in general, has been increasing at a rate significantly higher than inflation) and flat or declining revenues (due to the economic slowdown and, in particular, the difficulties in the housing market affecting property tax revenues and spending patterns). In addition, reliable access to capital has been interrupted during the past year by unprecedented turmoil and change in the bond market and the near disappearance of the bond insurance industry. Credit deterioration, both on the part of municipalities and financial counterparties, has caused some transactions, particularly those involving variable rate debt and/or interest rate swaps, to unravel.
In the face of these pressures, the possibility that municipalities may need to take extreme measures, including significant restructuring of their operations and even, in some cases, seeking protection under chapter 9 of the United States Bankruptcy Code, has led Orrick to create its Municipal Fiscal Distress Task Force. The task force comprises lawyers from several practice areas to combine their experience in:
- Public finance and municipal law
- Restructuring and creditors’ rights
- Financial markets, including derivative products and federal TARP funding
- Securities law, including disclosure
- Employee benefits, including pension and OPEB matters
- Litigation
- Tax
Municipal Insolvency and Workout Experience
- City of Vallejo, California. Orrick represents the city of Vallejo, California’s largest city ever to file for protection under chapter 9 of the Bankruptcy Code. Vallejo is the largest American city to be deemed eligible for chapter 9 relief. The case has generated cutting-edge legal issues, as well as litigation over a number of hotly contested factual issues, including those relating to the city’s insolvency and eligibility to be a chapter 9 debtor, and to its motion for approval of the rejection of the collective bargaining agreements with its four unions.
Orrick is serving as counsel in leading the city through the myriad federal and state pre-filing requirements to ensure compliance with chapter 9 eligibility requirements, including satisfying the Bankruptcy Code requirement for pre-filing negotiation with creditors, in developing and implementing a “pendency plan” for the city, in working with the city’s labor negotiators in reaching negotiated settlements of labor contract issues, and in pursuing rejection of unaffordable collective bargaining agreements in the event such negotiations are unsuccessful. Recently, Orrick obtained a landmark ruling from the bankruptcy court to the effect chapter 9 permits the court to allow rejection of collective bargaining agreements under federal law (principally, the Bildisco case irrespective of state law requirements). Orrick also is involved in negotiations with the city’s bond creditors and is dealing with restructuring and disclosure issues related to its capital markets transactions.
- City of Richmond, California. The city of Richmond, California, experienced significant financial difficulties from 2000 to 2004. In early 2004, Richmond projected a general fund deficit equal to approximately 30 percent of the general fund budget for fiscal year 2003–04. Richmond’s audited financial statements were late, and its accounting system was unable to produce reliable reports on the city’s finances. Orrick lawyers worked closely with Richmond and its financial advisors to develop a fiscal recovery plan for the city. Orrick lawyers provided critical advice to resolve its cash flow problems and allow it access to the market, as well as identifying innovative methods for Richmond to resolve its cash flow problems efficiently. Richmond successfully emerged from its fiscal crisis, now has a solid “A” rating and has been able to access the bond market for needed public programs and projects.
- Orange County, California. Orrick was hired as counsel to Goldman Sachs & Co. to advise on the allocation of monies to debt and other obligations during Orange County’s bankruptcy, financings during bankruptcy, the plan to exit bankruptcy and the bond financings that enabled the county to emerge from bankruptcy. After the bankruptcy case, Orrick was hired by the county as its principal finance counsel.
- Financial Control Board, Washington, D.C. In the early 1990s, the District of Columbia was experiencing severe financial problems and had an accumulated deficit in excess of half a billion dollars. In 1992, while at their prior firm, Orrick lawyers drafted legislation that was adopted by the U.S. Congress and amended the District‘s Home Rule Act to permit the District to issue long-term general obligation debt to finance its accumulated deficit. This was the first in a series of measures taken by or on behalf of the District to address its financial crisis.
- Jefferson County, Alabama. Orrick represents a significant creditor that has exposure in some of Jefferson County’s municipal financings and has had significant involvement since the county’s financial difficulties became known.
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Swap Workouts
Orrick’s experience with workouts of swap, repurchase agreements and other derivative products in bankruptcy proceedings includes our work with the city of Detroit, Orange County, Bear Stearns, Lehman Brothers, Refco and subprime mortgage originators, among others. We also work with counterparties and advise on structuring collateralizations, modifications, terminations and replacements for hundreds of swaps in connection with the recent meltdown in the auction bond and the insured variable rate demand note markets, the downgrade of the monoline bond insurers and bankruptcy of the various Lehman counterparties. In addition, Orrick has its own unique swap advisory group in conjunction with its wholly owned subsidiary, BLX Group.
- Oregon Public Employees Retirement System. Orrick represented the board that governs the Oregon Public Employees Retirement System (OPERS) in connection with two important victories involving approximately $6 billion in potential liabilities. OPERS members challenged claims that statutory reform of the OPERS statute was unconstitutional.
- City of Detroit. Orrick represented the City of Detroit in the restructuring of certain derivative transactions relating to the City of Detroit's 2006 Pension Obligation Certificates, of which $800 million were variable rate taxable certificates.
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Securitization of Municipal Assets
Orrick is the leading firm in the United States in the field of securitizing municipal assets. Orrick represents numerous banks and financial institutions in converting long-term tax-exempt bonds into floating-rate, money market-eligible securities. Orrick is also experienced in securitizing lease obligations and other municipal assets. Orrick’s know-how includes both primary market financings and secondary market transactions.
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VRDO/Auction Rate Bond Workouts
As a result of the widespread dislocation in the insured and municipal variable market in 2008 caused by the downgrades of the monoline bond insurers, Orrick lawyers developed various structures to assist our municipal clients with the substitution and conversion of letter of credit and standby arrangements, as well as various other credit supported financings. Many of these structures required expertise beyond traditional public finance law and were the result of collaboration with lawyers in our financial markets, restructuring, securities law, and corporate and municipal tax practices.
For example, Orrick lawyers have developed structures to address the current lack of appetite on the part of investors for outstanding auction rate and variable rate tender option bonds that are insured by one of the monoline municipal bond insurers currently facing ratings difficulties. One such structure is designed to take the bonds out of the market but still preserve the potential future value of the bond insurance policy, as well as any related swap insurance and/or reserve fund surety policy. The structure should work well for a number of different types of bonds. In addition, we have developed, and continue to develop, other structures for other types of bonds (such as lease-backed and certain conduit bonds).
We also have experience restructuring numerous transactions for public finance issuers in responding to the fallout arising from the downgrade of the financial sureties.
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Contact Us
Orrick provides innovative and practical legal advice to help our clients meet their objectives. For more information about Orrick and our Municipal Fiscal Distress Task Force lawyers, please contact publicfinance@orrick.com.
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