As we have previously speculated, Harrisburg PA, filed for bankruptcy last night. The city had rejected rehabilitation plans under Act 47 multiple times in the past year.
The market has been taking the long-anticipated announcement in stride: shares of Assured Guaranty, the city’s bond insurer, are up sharply today. HYD, Van Eck’s High Yield Muni Index, is down on the week, but not drastically.
We’ll be following the PA yield curve over the next few weeks: it will be interesting to see if investors no longer believe that the State will bail-out troubled municipalities any longer. My guess would be that this won’t have much impact: the Commonwealth of Pennsylvania has clearly been heavily involved with Harrisburg’s credit situation over the 18 months. The city council has acted as if they wanted to file over the past 4 months, so I don’t think most professional investors will react to this rashly.
More importantly, though, if the city comes out of bankruptcy substantially healthier than other Act 47 communities, the city may ‘de-stigmatize’ the bankruptcy process. There is no evidence that this has happened in the past, but given the near-universal strain on local budgets, there is potential for Harrisburg to meaningfully influence the actions of other communities in the long run.
