Rhode Island Does Right By Bondholders

Tucked away in a side column of an early August issue of the Wall Street Journal, in the Money & Investing section, was an article heralding Rhode Island's new law "that places bondholders ahead of other creditors."

In particular, the well-publicized case of Central Falls will now see bondholders receive their entire amount due of $635,000. Retirees, however, may not fare so well as the town filed for bankruptcy under Chapter 9.

The Journal piece explained,

"State officials and lawmakers say the law is needed to lure investors to bonds that will be sold by other Rhode Island municipalities. Without the law, future bond deals in Rhode Island likely would need to carry higher interest rates in order to entice potential buyers scared by the Central Falls bankruptcy filing."

The Rhode Island law is reported to be the first among the 50 states, and, if imitated, might reduce the bankruptcies forecast by analysts such as Meredith Whitney, as municipalities maintained access to bond markets to help them deal with near-term funding problems.

It's nice to see at least one state do the right thing and protect bondholders from elected officials seeking an easy way out that seems to let voters/taxpayers off the hook for their representatives' financial mistakes.