July 5 Detroit's announcement that it is
suspending payments on its unsecured debt as a likely prelude to
bankruptcy pushed the amount of defaulted debt in the U.S.
municipal bond market up to $6.96 billion in the first half of
2013, according to a report on Friday by Distressed Debt
That surpasses the national total of $4.8 billion of
defaulted munis in full-year 2012.
Defaults totaled only $277.5 million in the first quarter of
2013 then soared to $6.68 billion in the second quarter when
Kevyn Orr, a corporate bankruptcy lawyer selected by the state
of Michigan to run Detroit as an emergency manager, announced on
June 14 a moratorium on payments for certain debt he classified
The publisher of the newsletter, Richard Lehmann, said his
report included all of Detroit's $6.4 billion of outstanding
bonds even though some of it is considered secured and the city
has officially only defaulted on $1.45 billion of insured
pension obligation certificates of participation by skipping a
Orr, who is in the process of negotiating with bondholders,
bond insurers, city unions and others, has classified as
unsecured about $641 million of outstanding general obligation
bonds, including some approved by voters and backed by a
property tax levy.
Another $439.8 million of GO bonds were classified as
secured. The next debt service payment date for the GO bonds is
Oct. 1. Detroit also has more than $5.4 billion of water and
sewage revenue bonds outstanding that could be subject to
restructuring, according to a June 14 proposal Orr presented to
the city's creditors.
Lehmann said that given Detroit's dire financial and
mismanagement problems, its filing of what would be the biggest
Chapter 9 municipal bankruptcy ever is inevitable.
"When you look at the number of parties and objections that
are going to be raised there is no way this thing is going to be
resolved outside of bankruptcy court," he said, adding that all
bond payments would likely be suspended once the city enters
Orr's decision to default has raised concerns in the $3.7
trillion muni market that he has overstepped the authority
granted him under a 2012 Michigan law governing emergency
managers running fiscally stressed cities.
The law, which took effect in March, requires the managers
to produce a financial and operating plan that must provide for
"the payment in full of the scheduled debt service requirements
on all bonds, notes and municipal securities of the local
Orr's plan, released on May 12, stressed the need for
"significant and fundamental debt relief."
It outlined options such as restructuring outstanding debt
to push principal payments into future years, permanently
reducing the amount of principal, lowering interest rates or
issuing new debt to provide cash recoveries to creditors.
Bill Nowling, Orr's spokesman, has said the emergency
manager was acting within the letter and the spirit of the 2012
law and that the city, which has suffered from a severe drop in
population and revenue, lacks the cash to pay off its debts.