By Bernie Woodall and Steve Neavling
DETROIT, June 14 Detroit said on Friday it would
stop making payments on some of its about $18.5 billion debt,
which would put it in default, and the "insolvent" city called
on most of its creditors to accept pennies on the dollar to help
it avoid the largest municipal bankruptcy filing in U.S.
In a forceful opening salvo of negotiations with debt
holders, Detroit Emergency Manager Kevyn Orr announced a
moratorium on some principal and interest payments, including
one payment he said was due on Friday.
Under his proposal, Orr said unsecured debt holders would be
paid less than 10 cents on the dollar, but some creditors would
get a bit more based on city revenue. Some $11.5 billion of the
debt is unsecured and $7 billion secured, according to figures
presented by Orr.
Orr said secured creditors would get better treatment,
although how much better was not specified.
"We may try to get a discount from them, but the reality is
they are secured," Orr said.
Secured credit means an asset is pledged to back the debt.
For example, Detroit has secured its interest rate swap
agreements with casino revenue.
He said the city would skip a $34 million payment due on
Friday on $1.43 billion of pension certificates of
participation, to allow the city to conserve cash needed to
provide services to residents.
Fitch Ratings and Standard and Poor's Ratings Services
immediately downgraded Detroit's rating to a level reserved for
borrowers about to default.
"We expect default to be a virtual certainty," S&P said in a
statement accompanying its downgrade to CC from CCC-negative.
A trustee for the bond issue will have to certify that
Detroit failed to make the payment on Friday, which would
trigger a formal default.
Detroit's crisis is being closely watched by U.S. debt
markets. It did not immediately affect the $3.7 trillion U.S.
municipal bond market, where prices ended higher on Friday.
Orr said he would meet with creditors over the next 30 days.
Market participants said the outcome of those talks could lead
to higher interest rates for the state of Michigan and even the
broader market if Orr wins concessions from secured creditors.
"Financial mismanagement, a shrinking population, a
dwindling tax base and other factors over the past 45 years have
brought Detroit to the brink of financial and operational ruin,"
Orr said in a statement.
Orr said the city was "insolvent," unable to pay its debts
and needed shared sacrifices from everyone, including debt
holders, to have any hope of a revival.
Insolvency and inability to pay debts are two tests a
government must meet for a judge to accept a Chapter 9 municipal
"It looks and feels like a pre-packaged bankruptcy plan,"
said Richard Ciccarone, managing director at McDonnell
Investment Management, in reaction to the proposal.
A pre-packaged bankruptcy is when an entity negotiates a
deal with creditors and other interested parties in advance and
presents that to a bankruptcy court judge.
Orr, a bankruptcy attorney brought in by the state of
Michigan to clean up the city's finances, repeated after the
meeting that he sees a 50/50 chance of a bankruptcy filing.
It would be a first for a major U.S. city as New York,
Philadelphia and Cleveland all avoided formal bankruptcy filings
during their financial difficulties.
New York also declared a moratorium on some debt payments in
the 1970s, but creditors were ultimately paid in full under a
restructuring agreement, said Jim Spiotto, a municipal
bankruptcy expert at law firm Chapman and Cutler in Chicago.
In addition to the financial details, the 134-page document
presented on Friday describes collapsing city services, rising
crime and falling tax receipts.
Detroit is the poorest large city in the United States, with
more than a third of its residents living below the official
government poverty line, while its population has shrunk to
about 700,000 people.
The city has the highest violent crime rate of any major
U.S. city, some 78,000 abandoned and blighted structures and 40
percent of street lights dark, the document said. Only about a
third of the city's ambulances were in service in the first
quarter of 2013. Just 53 percent of owners paid their 2011
The document disclosed that Detroit could face unfunded
pension liabilities, such as for retired police and fire
workers, of $3.5 billion, up from the $644 million previously
Orr said unsecured creditors, including bondholders and
pension funds, will receive a pro rata share of $2 billion of
notes the city would issue and pay off as its financial
An oversight board could be created for Detroit, similar to
one set up after New York City's financial difficulties in 1970s
that would ensure reforms are sustained, Orr said. The New York
board created in 1975 still exists, although it is largely
City workers and retirees would also face changes to their
pensions and health care coverage "consistent with available
At the same time, Orr proposed investing $1.25 billion over
the next 10 years to improve the city's infrastructure, remove
or repair crumbling houses and update computer systems.
Initial reaction from debt holders and labor unions was
Emerging from the meeting, one bond holder who asked not to
be identified, said of Orr's proposal to pay them only pennies
on the dollar: "It's just too much. It is an unprecedented
amount to ask."
In the past, bondholders have not lost the principal amount
owed them as a result of the financial restructuring of major
cities such as New York and Cleveland.
Much of Detroit's debt is insured, giving bondholders
protection against defaults. Two of the insurers, National
Public Finance Guarantee Corp, a unit of MBIA and
Assured Guaranty Ltd, confirmed they attended the
"In the event that debt service payments by the City of
Detroit are interrupted, National will ensure that its
policyholders receive all of their principal and interest
payments on time and in full," spokesman Kevin Brown said.
Leaders of some of Detroit's 48 public sector unions were
upset by Orr's proposals, which included spinning off water and
sewer services into an independent authority, as well as making
the changes to pensions and health care coverage.
"When you're backed into a corner, the only thing you can do
is fight and the only way we can fight is to strike," said Mike
Mulholland, secretary and treasurer of AFSCME Local 207, the
union that represents water and sewer workers.