Detroit’s bankruptcy is unprecedented, not least because it’s the largest one ever.
In a new note, Fitch warns that if a judge accepts the current version of emergency manager Kevyn Orr’s bankruptcy filing, every other municipal bond in the country could get put on notice.
Here’s the deal: Orr is trying to treat the city’s unlimited tax general obligation bonds [ULTGOs] as totally unsecured debt.
That means it is eligible for large haircuts — if you hold one of these bonds, you are going to be losing multiple cents on the dollar off the original amount owed.
To avoid an overly enormous haircut, Orr has been trying to raise revenue through taxes, as required by the bond.
But Fitch says the sums levied to date won’t be enough, and the city will still end up defaulting on the debt at its next service payment date, Oct. 1, 2013.
The thing is, ULTGOs are customarily supposed to be treated as slightly less unsecured than limited tax general obligations [LTGOS].
And Fitch really, really doesn’t like that Orr is lumping them together.
If the federal magistrate overseeing the case okays Orr’s manoeuvre, the agency warns, it may have to reexamine how it treats all other muni bonds:
There has been little precedent for the classification of ULTGOs as general unsecured debt. The [emergency manager]’s grouping together of ULTGO and LTGO bonds, as well as with employee benefit payments, as a single class of creditor is at odds with Fitch‟s prior expectations.
If it is confirmed in bankruptcy, it will lead the agency to rethink the distinctions made between tax-supported ratings within Michigan and perhaps nationally.
Reuters Edward Krudy and Deepa Seetharaman reported in August that creditors had proposed restructuring the debt to extend its term date.
But Orr was apparently unreceptive:
“Who wants a 70-year mortgage?,” Orr said.
“Saddling the city with decades of potential payments may not comport with our concepts of what’s sustainable,” Orr said, declining to comment on any specific discussions.
Creditors have also noted that the amount the city owes in unsecured GO bonds, $US530 million, pales in comparison to the $US9 billion owed to pensions and health benefit funds.
What a mess.