June 26, 2013 / 10:31 PM / 6 years ago

If Detroit opted for bankruptcy, experts say wouldn't encourage others

(Reuters) - A bankruptcy filing by cash-strapped Detroit would be unprecedented, but the city’s situation differs so much from other troubled municipalities that it would unlikely become a model for others to follow, two analysts said on Wednesday.

Lawyer Kevyn Orr (R) and Detroit Mayor Dave Bing (L) listen as Michigan Governor Rick Snyder announces Orr as his choice for emergency financial manager for the city of Detroit, in the state offices at Cadillac Place in Detroit, Michigan March 14, 2013. REUTERS/ Rebecca Cook

On the U.S. municipal bond market, Detroit is widely followed as a test case for the deep losses demanded of holders of general obligation bonds.

“I wouldn’t want to say that this is precedent setting,” Jack Dorer, a managing director at Moody’s Investors Service, said at a roundtable of four bankruptcy experts with Reuters Insider on Wednesday. “The situation for Detroit is just so unique. They are under dire financial straits, and I think the other high-profile bankruptcy cases that we’ve seen often involve things like enterprise risk, so it’s different.”

Alabama’s Jefferson County, whose Chapter 9 filing now ranks as the largest municipal bankruptcy in U.S. history, was such an example, with its finances crippled by a sewer system project.

Two experts at the Reuters Insider roundtable said a bankruptcy filing for Detroit is a near certainty and that a debt-reduction deal proposed by the city’s emergency manager is tantamount to a “premeditated” bankruptcy plan.

For Detroit, which earlier this month defaulted on a nearly $40 million debt payment, the chance of a bankruptcy is “as close to 100 percent as you can get without making a guarantee,” said Tom Metzold, co-director of municipal investments at Eaton Vance Management.

A bankruptcy filing by Detroit would eclipse the filing by Jefferson County, Alabama.

Detroit’s emergency manager, Kevyn Orr, has presented an out-of-court proposal to rescue Detroit from insolvency, under which some bondholders would get pennies on the dollar.

The plan demands labor unions and pensioners as well as bondholders share the pain of restructuring.

“There’s just too many constituencies at odds with each other, and the impact and the precedent that would be set if they were to accept these discounts... would be quite harmful for the (municipal bond) industry,” Metzold said.

Orr himself has said that he sees a 50/50 chance of filing for bankruptcy.

Under a so-called pre-packaged bankruptcy plans, creditors and debtors work out most of the details before filing.

But for Detroit, Orr’s proposal - in particular its low opening offer to bondholders and its lack of revenue raising proposals - could be called a “premeditated bankruptcy” aimed at pushing frustrated bondholders into court, said Richard Larkin, direct of credit analysis at New Jersey-based HJ Sims.

The state of Michigan has also remained largely silent since Orr’s proposal, Larkin noted.

“I think bankruptcy was the plan all along from the moment Kevyn Orr was hired,” Larkin said.

Lawyer James Spiotto, head of the bankruptcy group at Chapman and Cutler in Chicago, noted that major cities - including New York, Cleveland and Philadelphia - have historically chosen to restructure or renegotiate debt without resorting to a Chapter 9 filing.

“It’s still too early to tell,” Spiotto said of Detroit, adding that bankruptcies are expensive and time-consuming, and they don’t always deliver the result hoped for by creditors.

Reporting by Hilary Russ; Editing by Tiziana Barghini and Leslie Adler

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