Feb 24 Detroit's plan to deal with its $18
billion of debt and emerge from municipal bankruptcy would set a
troubling precedent for the U.S. municipal bond market, Fitch
Ratings said on Monday.
Under the plan Detroit filed in U.S. bankruptcy court on
Friday, owners of certain general obligation (GO) bonds would
take an 80 percent haircut on their investments.
The city's two pension funds, meanwhile, would see higher
recovery rates, aided by pledges worth about $830 million from
philanthropic foundations, the Detroit Institute of Art and
Michigan Governor Rick Snyder, who still must win legislative
approval for the state's $350 million share.
"Fitch considers Detroit's plan of adjustment to be hostile
to GO bondholders," the rating agency said in a statement. "If
this priority of creditors is upheld, Fitch expects that this
disregard for the rights of bondholders will factor into higher
borrowing costs for local issuers, and ultimately for local
property taxpayers, in Michigan."
The rating agency took particular issue with the treatment
of voter-approved unlimited tax GO bonds as unsecured. Insurance
companies that guaranteed debt service payments on those bonds
have sued the city over this treatment.
Judge Steven Rhodes, who is overseeing Detroit's bankruptcy
case, said last week he would rule on the matter in two to three
weeks but urged the insurers and the city to settle their
dispute before that.
Fitch said it was also troubled by the lawsuit Detroit filed
last month aimed at invalidating $1.45 billion of certificates
of participation (COPS) it sold in 2005 and 2006 to raise money
for its pension payments.
"The plan includes reducing COPs recovery to zero while
remaining silent on whether or not the pension system, which
benefited from the sale of the COPs, would return any of the
borrowed assets," Fitch said.
Moody's Investors Service, another major U.S. ratings
agency, issued a separate report Monday that noted Detroit
workers and retirees fared better in the plan than bondholders.
Moody's also said the blueprint, which is subject to
bankruptcy court approval, would make "significant changes" to
the terms of outstanding water and sewer bonds, including the
ability to call all of the debt without having to pay any
premium or penalty.
One option cited in Detroit's plan would have the city issue
new bonds in the same outstanding principal amount but with
lower interest rates.
Standard & Poor's Ratings Services said on Friday it will
review the plan to determine if its treatment of water and sewer
debt affects the BB-minus rating on the bonds.