Municipal Bond Forum
Detroit’s finances
Q
What is your opinion regarding the safety of the city of Detroit’s general obligation, water and sewer munis?
A
James A. Klotz responds:
As you are aware, the city of Detroit has been in financial distress for quite a while. As a result of the city’s inability to overcome its chronic budget problems, the governor has appointed an Emergency Financial Manager who will have significant ability to make budget reductions, alter existing contracts and can even recommend to the governor that the city file for Chapter 9 bankruptcy. The law under which the manager was recently appointed took effect March 28, 2013; he has only recently taken office.
We believe that the manager would be reluctant to allow the city to default on its bonds because access to the financial markets for capital projects is the lifeblood of any municipality. However, the financial problems of Detroit are sufficiently severe that some sort of debt adjustment or restructuring cannot be ruled out. This would especially be the case should the city file for bankruptcy.
The enterprise debt of the city, i.e., water and sewer, would likely fare better than other city debt in such a case since those bonds are paid by a dedicated revenue stream. Typically, such debt has been allowed to continue to use system revenues to pay debt in other communities facing distress. In Detroit’s case, the water and sewer systems also serve other communities outside the city, and there would likely be a reluctance to take actions that would affect entities outside of the city.
Standard & Poor’s rates Detroit’s GOs “B” and Moody’s assigns the city a rating of “Caa1.” Both rating agencies cite the great uncertainty ahead as to whether the city’s debt repayments will continue unaffected by the appointment of the emergency manager and the potential of a bankruptcy filing. Of course, bonds that carry insurance are expected to be paid on time, as they have in the past. The city is entering uncharted waters and we will watch events carefully as events unfold.
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