Municipal Debt Investors May Be on Uneven Footing in Chapter 9

Investors in municipal securities may face a greater risk of recovery than certain other similarly situated creditors in a municipal bankruptcy. Why? Because it may be politically or otherwise advantageous for the municipal debtor to favor other creditors (such as, chiefly, current and former government employees) and recent bankruptcy court decisions lend support to this favoritism. So, while municipal bankruptcies are rare compared to chapter 11 bankruptcies, municipal investors should carefully evaluate (price) the risks associated with a municipality’s potential bankruptcy before investing in its securities.