Thursday, June 13, 2013

Prospects for Detroit's Unusual Bond Pledges

Despite the emergency financial manager protestations to the contrary, Kevyn Orr is almost certainly going to recommend a Ch. 9 filing for Detroit. The governor's approval is a significant hurdle to that recommendation becoming reality, especially considering that the emergency manager law stipulates that the city plan and budget to repay debt service in full. Orr's recent comments suggests he does not seek to abide by that statute.

Of course, Orr's attempt to reduce debt service may be inspired by public relations more than bona fide expense reduction. OPEB liabilities are generally written in graphite, not ink, even before considering the special powers vested in the emergency manager. Detroit's $6B liability can go as low as Orr needs it to go, but attacking malicious Wall Streeters will give him and his supporters cover to take actions with less legal hurdles.

Imposing losses on debt holders and insurers will take a bankruptcy filing, and even then, only limited tax general obligation bonds would be in serious danger. These LT GOs are an emperor with no clothes: while they are called general obligations, they are not the unlimited tax GOs that are the pinnacle of legal security in muniland. The LT GOs must be paid for out of available sources in the general fund, and as such their credit has more in common with traditional Certificates of Participation and lease revenue bonds than ULT GOs. COPs and lease revs traditionally are secured by a leased asset while LT GOs are basically just an unsecured credit of the general fund. Based solely on the pledge behind the bond, Detroit LT GOs could fair worse than Vallejo's golf course COPs. Lobbying by the cult of GOs would be the best hope for these bonds should a Ch. 9 filing occur. Detroit has uninsured and Ambac-insured LT GOs outstanding.

Pension Obligation bonds traditionally have LT GO pledges, but Detroit bucks the trend here too. The city's Pension Ob structure is technically a lease revenue, but has all the strength of an unlimited tax general obligation. More specifically, the credit has all the strength of vested benefits of a pension plan including an unlimited taxing authority should the city miss a payment, legally transferred to it with that transfer receiving the blessing of a court. Detroit's Pension Obligation Certificates are insured by FGIC and Syncora. NPFG/MBIA and Assured Guaranty insure some true ULT GOs.

Like Vallejo, Detroit's essential service revenue bonds will likely remain unaffected by any emergency manager debt haircut initiatives or bankruptcy filing.

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