July 9 Ambac Assurance Corp joined
growing opposition to a proposal by Detroit's emergency manager
to default on certain bonds, including some the city backed with
a pledge of its full faith and credit when they were sold, and
warned that a default on them would hinder its ability to borrow
in the future.
Ambac, which insures $170.3 million of Detroit's general
obligation bonds, released a statement late Monday criticizing a
plan by Kevyn Orr, the city's state-appointed emergency manager,
to treat Detroit's GO bonds similarly to the city's "unsecured"
debt, offering bondholders just pennies on the dollar.
The statement also criticized the state of Michigan for its
implied support of Orr's approach.
Ambac, in its statement, raised the prospect that Detroit
could have difficulty selling bonds in the future as a result of
Orr's approach. "A successful revitalization of the city will be
dependent upon its ability to access cost-effective financing in
the future, including general obligation funding," Ambac said in
the statement. "Such access will be needlessly imperiled as a
result of the emergency manager's approach and the state's
apparent support thereof."
There was no immediate response to Ambac's statement from
spokespersons for Orr and top Michigan officials.
The statement from Ambac comes at a time of rising friction
between Detroit and its bond insurers. Last Friday, the city
sued Syncora Guarantee, another insurer of Detroit bonds,
claiming the company interfered with its efforts to reach a deal
to terminate interest rate swap contracts.
Ambac is one of several insurers of Detroit's municipal
debt. The company sold policies to Detroit that require Ambac to
make debt service payments in the event the city skips payments
on its bonds.
Ambac said it hired Harrison J. Goldin of Goldin Associates,
LLC as an adviser. Goldin served as New York City's comptroller
during its financial crisis in the mid-1970s.
"It is short-sighted to signal to lenders that they cannot
trust the city's unconditional pledge to repay its general
obligation debts, especially given that the general obligation
bonds in question comprise less than 3 percent of the city's
estimate of its liabilities," Goldin said in the statement.
Orr on June 14 announced the city would stop paying on $11.5
billion of unsecured debt, starting with a default on $1.45
billion of pension obligation certificates of participation. Orr
also said he considers about $641 million of general obligation
debt, including $410 million of unlimited tax bonds, to be
At the same time, Orr proposed that all unsecured creditors
would receive a pro rata share of $2 billion of notes the city
would issue and pay off as its financial circumstances improve.
The proposed debt restructuring was part of Orr's sweeping
plan to fix the finances of the cash-strapped city that has been
plagued by years of declining population and falling revenue. If
negotiations with creditors fail, Orr could recommend Detroit
file for Chapter 9 bankruptcy, which would be the largest
municipal bankruptcy filing ever.
Several analysts in the $3.7 trillion U.S. municipal bond
market have said Detroit's treatment of its GO bonds would have
negative ramifications that could boost borrowing costs for
Michigan and its local governments.
Investors are expected to keep a close eye on Detroit's
lawsuit against Syncora. The lawsuit claims Syncora illegally
interfered with the city's efforts to tap into tax revenue from
casinos as part of an agreement in principal to end swap
contracts with counterparties UBS AG and SBS Financial Products
Company without having to pay a more than $340 million
Syncora covered $24.7 million of the $35.26 million of
combined payments due last month on the city's pension debt as a
result of the default. Another insurer, Financial Guaranty
Insurance Corp., did not remit a payment of about $16.2 million,
according to U.S. Bank, the bond trustee. FGIC, which is
undergoing a court-ordered rehabilitation process, did not
respond to requests for comment.