Bond covenants are generally inviolable, but bankruptcy can
change that. Recently, Puerto Rico’s bankruptcy allowed the country to restructure
sales-tax backed bonds. Owners of these bonds will receive 93 cents
on the dollar, more than the bonds were recently trading for, but will give up
half of the promised sales tax that was backing the bonds. This is better than
Detroit’s general tax obligation bonds, who only received 75 cents on the
dollar. However, other holders of debt of Puerto Rican debt received much lower
payouts, an indication of the priority of claims in a municipal bankruptcy.
