Jan 27 Michigan Governor Rick Snyder's proposal
to allocate $350 million in state funds towards Detroit's
pensions is another troubling sign for bondholders that could
ultimately hurt the state and its local governments in the
municipal debt market, Fitch Ratings said on Monday.
The credit rating agency said the move "demonstrates
continued weak support for bondholder security and repayment
stemming from Detroit's bankruptcy."
"In Fitch's opinion, action that suggests pensions' claim on
limited resources should be given priority to that of
bondholders could establish a troubling precedent, at least in
Michigan and perhaps beyond, given the paucity of significant
municipal bankruptcy filings historically and the resulting
focus on the Detroit case," Fitch said in a statement.
Michigan's largest city filed for Chapter 9 municipal
bankruptcy in July with an eye toward treating pensions and
certain general obligation bonds approved by Detroit voters as
unsecured debt with creditors receiving only pennies on the
On Oct. 1, Detroit defaulted on a $9.37 million interest
payment for those bonds.
The city's treatment of bonds backed by a full-faith and
credit pledge roiled the $3.7 trillion U.S. municipal market.
General obligation bonds traditionally are considered secured
debt, making them one of the safest bets for investors.
Snyder last week pitched a plan that would need legislative
approval to raise $350 million to aid Detroit's retirees after a
group of foundations pledged more than $330 million to protect
the city's pensions and art museum. Michigan's money would come
from the state's share of a multi-state settlement with U.S.
Comments by Snyder that state funds will not bail out
bondholders or Wall Street "suggests an 'us versus them'
orientation to debt repayment that undermines willingness to pay
public debt in Michigan," Fitch said.
Fitch also noted that unlike Michigan's implicit support for
Detroit's treatment of GO bonds as unsecured debt, Rhode Island
in the Central Falls bankruptcy case decided "to protect GO
bondholders by applying a statutory lien to all such local
government debt in the state."
Detroit's October bond default led a trio of bond insurers
that guaranteed payments on the bonds to sue the city in
November, claiming the city violated Michigan law by paying
operating expenses using property taxes that had been levied
exclusively to pay off the bonds. Detroit has asked the U.S.
Bankruptcy Court to dismiss the lawsuits.
The next payment date for the bonds is April 1 when nearly
$47.6 million in principal and interest is due to bondholders,
according to the lawsuits.
On Dec. 3, Judge Steven Rhodes ruled that Detroit is
bankrupt and that its pensions could be subject to cuts as part
of the city's restructuring. Kevyn Orr, Detroit's
state-appointed emergency manager, has pegged the unfunded
pension liability at $3.5 billion.