Assured Guaranty Statement on U.S. Supreme Court’s Declining to Hear Appeal of Special Revenue Bond Decision

January 15, 2020

On January 13, 2020, the U.S. Supreme Court declined to hear Assured Guaranty’s appeal of the decision by the First Circuit Court of Appeals (First Circuit) that the Bankruptcy Code permits, but does not require, continued payment of special revenues by a debtor during the pendency of bankruptcy proceedings. We believed it was important to appeal the decision because it contradicted a prior bankruptcy court decision, the related legislative history and the municipal bond market’s long-held understanding of the treatment of special revenue bonds during bankruptcy proceedings and, further, that it could raise the cost of borrowing for many municipal issuers.

Nevertheless, we believe the ultimate impact on our Puerto Rico and other special revenue exposures will be limited.

• The First Circuit’s decision impacts only the timing of the application of special revenues to the payment of debt.  It does not, in the end, adversely affect the validity of liens on special revenues. As a secured creditor whose lien survives a bankruptcy filing, we will be entitled to a distribution of our special revenue collateral at the end of the case, upon confirmation of the debtor’s plan of adjustment.
• The decision is binding precedent only in the First Circuit – Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island.  Bankruptcy and appellate courts in other jurisdictions outside the First Circuit will not be bound to follow this decision.  In fact, this is only the second reported decision addressing special revenues since enactment of the special revenues provisions in 1988.  We believe courts in other jurisdictions may be more inclined to adopt the ruling in the Jefferson County, Alabama bankruptcy case, where the court held that continued payment of special revenues by a debtor during the pendency of a bankruptcy case is mandatory, based on what we consider a more compelling argument.
• Additionally, if there is evidence that the pledged bond collateral is being diminished while payments are withheld during the bankruptcy proceedings, creditors may still seek traditional automatic stay relief to enforce the application of pledged special revenues to the payment of debt, including by enforcing their liens on special revenues during the pendency of a bankruptcy proceeding.