Detroit case may alter distressed U.S. city behavior: Moody's

Fri Jul 26, 2013 3:45pm EDT

A vacant, boarded up house is seen in the once thriving Brush Park neighborhood with the downtown Detroit skyline behind it in Detroit, Michigan March 3, 2013. REUTERS/ Rebecca Cook

A vacant, boarded up house is seen in the once thriving Brush Park neighborhood with the downtown Detroit skyline behind it in Detroit, Michigan March 3, 2013.

Credit: Reuters/ Rebecca Cook

Related Topics

(Reuters) - Detroit's filing for bankruptcy protection is "profoundly meaningful" for the small number of local governments in the United States that are below investment grade, and could change their approach to pensions and other long-term liabilities, Moody's Investors Service said on Friday.

Some distressed local governments could even find bankruptcy more appealing if Detroit can use its Chapter 9 case [ID:nL1N0FU01E] to slash pension benefits or general obligation debt, Moody's said.

But drawn-out, costly litigation could also deter other cash-strapped cities from filing, said Moody's Managing Director for Public Sector Ratings Anne Van Praagh.

"If Detroit is bogged down in years of expensive proceedings and fails to restore solvency or materially restructure its liabilities, other distressed issuers would be unlikely to emulate Detroit's approach," Van Praagh said in a Moody's report.

Moody's rates the vast majority of U.S. cities and towns above Baa3 and does not expect them to be affected by Detroit's dire situation.

The credit rating agency has just 34 local governments at speculative grades.

There could be a "modest increase" in the number of those towns that choose to use tactics similar to Detroit's if the Michigan city succeeds in cutting accrued pension benefits and general obligation debt, Moody's said.

In particular, if Detroit emergency manager Kevyn Orr is able to treat GO debt as unsecured, "the example could weaken GO claims relative to secured liabilities in other potential bankruptcy situations, and we could change the rank ordering of various debt security types including GO bonds," Moody's said.

(Reporting by Hilary Russ in New York; editing by Chizu Nomiyama, Tiziana Barghini and Matthew Lewis)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (16)
Upstate184 wrote:
Orr and Snyder are morons who are going to throw the municipal bond market into chaos for the entire country for the years it takes for the courts to determine they’re wrong about GO bonds. I’m dumping all munis from Michigan because of their incompetence.

Jul 26, 2013 2:23pm EDT  --  Report as abuse
Upstate184 wrote:
Orr and Snyder are morons who are going to throw the municipal bond market into chaos for the entire country for the years it takes for the courts to determine they’re wrong about GO bonds. I’m dumping all munis from Michigan because of their incompetence.

Jul 26, 2013 2:23pm EDT  --  Report as abuse
Upstate184 wrote:
Orr and Snyder are morons who are going to throw the municipal bond market into chaos for the entire country for the years it takes for the courts to determine they’re wrong about GO bonds. I’m dumping all munis from Michigan because of their incompetence.

Jul 26, 2013 2:23pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

Full focus