July 26 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
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
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
The credit rating agency has just 34 local governments at
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.