Detroit; The Takeover

Last week Michigan Governor Rick Snyder announced that the city of Detroit is in a state of fiscal emergency and that, within the next couple of weeks, he will appoint an emergency manager to take over the struggling city’s mismanaged finances.  Despite the city’s moderate issuance of general obligation debt, $963 million currently outstanding, its $5.7 billion post-employment benefit obligation and total long-term liability figure of nearly $15 billion is crushing the city’s budget and will have to be restructured.  While this development will be a credit positive over the long term, as the emergency manager will have the ability to make unilateral decisions on tough issues in order to address these obligations and the city’s budget, it is not yet clear what the near-term ramifications will be.  According to an article in the Bond Buyer, the Governor said he "expects an EM would ask all creditors to be part of the restructuring, and that ‘all the creditors need to be called to the table.”  While this could mean a state-supported refinancing, it could also mean haircuts to bondholders.  If the EM goes the haircut route, it could put a great deal of pressure on other distressed Michigan cities and ultimately the state itself as demands for support increase.  SNW Asset Management does not hold debt of the city and continues to diligently avoid obligations of entities that have not proven they can prudently manage their finances, both on and off-balance sheet.