January 9, 2013 / 7:15 PM / in 5 years

Moody's sees bondholder risks in new Michigan manager law

Jan 9 (Reuters) - Owners of bonds issued by Michigan local governments face default and bankruptcy risks from provisions in a new state emergency manager law, Moody’s Investors Service said in a report this week.

The law, which takes effect March 1, gives local governments and school districts options for dealing with their financial emergencies, including the appointment of an emergency manager and the ability to file for municipal bankruptcy with the approval of the governor.

Moody’s said the law could expedite bankruptcy filings by allowing governments to immediately head to court once a financial emergency is determined.

Another option, arbitration with a neutral party, can also lead to a bankruptcy filing with the governor’s approval if mediation fails to produce a resolution in 60 days, according to the rating agency.

The arbitration process, which would involve bondholders, unions, pension funds and other interested parties, could also result in bond defaults, Moody’s noted.

“Because the neutral evaluation mediation process is new and untested, it is unclear whether bondholders, creditors, and other interested parties would choose to participate, which could result in a request to file bankruptcy,” Moody’s said in the report.

The rating agency also said the new law, which was passed by the Republican-controlled legislature and signed by the governor last month, may be challenged by groups that opposed previous emergency manager laws, “creating continued uncertainty for all stakeholders.”

Still it said the law will result in increased transparency and enhanced details of fiscal problems and keeps in place existing managers and consent agreements that allow for the suspension of collective bargaining agreements.

“The consent agreement provides local governments the opportunity to retain control, but holds them accountable for timely results,” the report said. “Any failure to achieve the consented targets would result in the appointment of an emergency manager.”

Detroit, Michigan’s largest city, was able to avoid the appointment of an emergency manager last year by signing onto a consent agreement that gave the state some oversight. However, the slow pace of reforms led Michigan officials to use a current law to launch a new review of Detroit in December that could culminate in an emergency financial manager and possible bankruptcy filing.

The new emergency manager law replaces a 2011 law that was repealed by voters on Nov. 6. Until it takes effect, the state is relying on an older, weaker law. The new law includes appropriations for administrative expenses, making it ineligible for a petition drive that could result in its repeal by voters.

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