January 22, 2020 – In a report released today, Moody’s summarized the U.S. Supreme Court’s (“SCOTUS”) decision not to review the First Circuit decision ruling Puerto Rico’s Highways and Transportation Authority (“HTA”) need not pay debt service on “special revenue” bonds while restructuring.

Given SCOTUS’s denial to review, the First Circuit ruling is now binding in Puerto Rico, Massachusetts, Maine, New Hampshire and Rhode Island.

The Moody’s analytical team opined that the SCOTUS ruling could have a material impact on various municipal credit structures including revenue bonds issued by utilities and special purpose entities:

“The Supreme Court’s decision is a credit-negative development not only for HTA creditors but investors in several categories of municipal debt, including utility revenue, special tax and tax increment financing bonds, as the question of whether governments must pay debt service on these promises during a Chapter 9 filing remains open.”

The First Circuit decision is the second decision ruling on the enforceability of the special revenue pledge. In 2012, the Bankruptcy Court for the Northern District of Alabama ruled the opposite – requiring Jefferson County, Alabama paid bondholders even though the county was undergoing a bankruptcy process.

With two differing opinions on how special revenue debt would be treated by U.S. courts, Moody’s observed that the issue would be “an ongoing uncertainty for investors”.

Given the uncertain legal landscape, Moody’s emphasized the importance of the linkage between utilities and parent local governments, saying:

“Our view that the credit quality of an enterprise system is closely linked to that of the parent government, will not fundamentally change. Under either interpretation, a special revenue pledge is susceptible to potential impairment or default in bankruptcy, unless the pledged net revenues are secured and sufficient to pay debt service net of operating expenses. And the shared economic base with the parent is always an important factor in a utility’s future revenue strength.”

Contact Karen Bigelow at KBigelow@buymuni.com.