Alaska Oil Bond Lawsuit Hurts Bond Offering

By George Khoury, Esq. on July 18, 2018 | Last updated on March 21, 2019

The state of Alaska has put its billion-dollar oil bond offering on hold after a lawsuit was filed challenging the recently passed law authorizing the bond sale. The oil companies that were likely to be paid back as a result may just have to wait a little while longer.

Curiously, the lawsuit was actually filed before the law was signed by the state's governor, and it has nevertheless resulted in stalling the bond sale. It was noted that while the lawsuit's challenge is only preliminary and the allegations haven't been tested, the effect is unavoidable in the bond market. Simply put, the lawsuit impacts the bond's "marketability" or makes the bonds just a little bit less attractive to the investors since the legal challenge adds risk.

Bonds Away

The state of Alaska recently passed HB 331 which authorized the state to issue $1 billion in bonds to pay off debts owed to oil companies that were to receive oil and gas tax credits from a defunct program. The bond sale is intended to raise funds, while at the same time, asking the oil companies to voluntarily reduce the debt in exchange for a faster payout.

The lawsuit alleges that the bond's issuance does not conform with the state Constitution's restrictions on the state being able to incur debt, particularly as applied to a bond sale. However, the state believes otherwise, and has stated that it may move forward with the bond sale if the state court issues a decision in its favor in the pending motion to dismiss, even if an appeal is filed.

Interestingly, despite the early filing exposing the challengers to a ripeness challenge, the state announced that it would not challenge on those grounds for reasons of judicial economy.

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