City of Detroit – What are we Following?

There are numerous issues surrounding the City of Detroit bankruptcy and many unknowns.  Here are the five salient issues we are following.  First, the proposed bankruptcy timeline is 15 months and roughly corresponds with the Emergency Managers term limit, which expires September 2014.  That does not mean that all issues related to this bankruptcy will be decided by the fall of 2014.  Second, distressed debt investors’ are eyeing pension obligation and water/wastewater debt, betting the recovery rate will exceed the current value of the bonds.  Pension Obligation bonds recently traded at 41 cents on the dollar.  We are not playing in any of these bonds currently as the outcomes are far from certain.  Third, so far there has been no Detroit contagion within the municipal bond market, though coming supply will test the tax-free bond market.  Fourth, the debate about the seniority of secured debt and pension liabilities will likely set precedence for other distressed jurisdictions within Michigan and could involve Congress, the US Supreme Court, or both.  Fifth, and most important, is the potential for unlimited general obligations to lose their secured position in this bankruptcy proceeding.  If unlimited GO bonds lose their secured position there could be a systematic effect on the entire municipal market.  SNWAM, as always, will vigilantly monitor the ongoing events in the City of Detroit and position our clients’ portfolios to protect them from any fallout and take advantage of relative value opportunities that arise.