Moody’s Says Detroit Manager Makes Bankruptcy Option

The financial-recovery plan by Detroit’s emergency manager may harm the city’s bondholders because it indicates he is considering an effort to avoid paying in full, according to Moody’s Investors Service. The plan released by Kevyn Orr on May 13 “indicates that the city requires ‘significant and fundamental debt relief’ to help shore up its finances, a clear indication that a default or bankruptcy is a real option,” according to Moody’s. Detroit would join Stockton and San Bernardino, both in California, and Jefferson County, Alabama, in trying to stick bondholders with a loss. Stockton is one of five municipal issuers rated by Moody’s Investors Service that defaulted in 2012. Orr’s report said he will use a “fair and equitable” standard to restructure payments. “This language has been used in relation to other bankruptcy proceedings to manage creditors’ expectations on recovering their assets in bankruptcy, setting the stage for reductions to all stakeholders, including bondholders,” said the Moody’s report released today. Unpleasant Record Orr, a 55-year-old Washington restructuring lawyer appointed by Republican Governor Rick Snyder, declined to comment on the Moody’s report. His spokesman, Bill Nowling, said Orr and his advisers “continue to work diligently to resolve the city’s financial challenges and create a viable financial future for all of Detroit’s constituents.” Orr has said he hopes to avoid bankruptcy by negotiating with creditors and reining in retirement costs. Michigan Treasurer Andy Dillon has said Detroit would be the largest U.S. municipality to declare bankruptcy. Detroit’s long-term obligations are at least $15.7 billion, including unfunded pension and retirement benefits. The general fund this fiscal year, with revenue of about $1.1 billion, will pay about $461 million for debt and health costs, according to the emergency manager’s report. Tax-exempt Detroit general obligations maturing in April 2015 traded today at an average price of 88 cents on the dollar, down from 94 cents earlier this week and 13 percent below their 2008 issue price, data compiled by Bloomberg show. The yield on the securities is 12.4 percent, compared with 0.35 percent on benchmark AAA munis due in two years. Moody’s gives Detroit’s general obligation and certificate of participation debt a Caa1 rating, seven levels below investment grade. Most of the city’s debt is tied to water and sewer revenue, not the general fund, the Moody’s report said, and there is a negative outlook on those obligations. Debt paid from general-fund accounts is just under $3 billion. Read the rest at http://www.bloomberg.com/news/2013-05-16/detroit-recovery-plan-negative-for-bondholders-moody-s-says-1-.html