The city of Detroit, which filed for bankruptcy July 18th, will continue to pay secured creditors, including water and sewer bondholders, according to credit market analysts.
The Detroit Free Press, quoting a local bankruptcy attorney, said an automatic stay will be issued on most of Detroit’s obligations, including unsecured debt. However secured creditors, who could seize city assets for non payment, will be paid.
The view is consistent with a plan issued in June by Kevyn Orr, Detroit’s emergency manager. The plan, as we outlined in “Detroit Issues Proposal for Creditors,” classifies the city’s debt into two distinct categories: secured and unsecured, depending on whether a dedicated payment stream supports the bonds.
Detroit’s water and sewer debt is identified as secured because water and sewer revenues are pledged for repayment, and the proposal calls for full repayment of the system’s debt.
Fitch Ratings see bondholders as being in a strong position should payments ever be questioned.
“Fitch sees no apparent reason for bondholders to accept any impairment given the very strong legal position of this debt in a Chapter 9 bankruptcy proceeding,” the rating agency said in a statement just prior to the bankruptcy filing. The bonds have their own investment stream and continue to pay.
The revenue bonds have carried investment-grade ratings for years. The city’s water and sewage department, one of the largest in the nation, serves about one-third of the state and is considered healthy. The bonds enjoy a statutory lien and have continually produced adequate debt coverage. Additionally, most of the bonds are insured.
Fitch maintains an investment grade rating on the water and sewer system bonds.
“The ratings reflect Fitch’s view of the stand-alone credit profiles of the individual water and sewer systems as well as the substantial protection provided to water and sewer debt as special revenue bonds in the event of a Chapter 9 bankruptcy proceeding by the city,” Fitch said.
Detroit’s bankruptcy filing was decades in the making, with the fallout likely to last for years.
Manufacturing in the Motor City has crumbled and its population numbers have steadily shrunk. Mired in an estimated $18 billion in debt, the city’s General Obligation bonds have been downgraded repeatedly over the years.