The bankrupt City of Detroit completed a tender offer last week that will allow them to refinance a little over a quarter of their outstanding water & sewer debt and move past one of the final hurdles in the bankruptcy proceedings. Under the initial debt-cutting proposal from the city’s emergency manager, about 43% of the outstanding water & sewer bonds would have been impaired. Because these obligations are generally considered secured obligations due to their legal security pledge of a dedicated revenue source, it might have been difficult to legally impair them had the city not changed tack and made the tender offer, but there is no guarantee what the bankruptcy court judge would have decided. The tender offer will provide certainty on price received for those who chose to tender bonds. $1.47 billion, or 28%, of the $5.2 billion outstanding water & sewer bonds were tendered and any bonds that were not tendered will be paid in full. Detroit will issue bonds this week to fund the purchase of the tendered bonds, reducing the amount of interest that the city will have to pay on this portion of the outstanding debt. This will allow the city to save up to $241 million in interest cost over 26 years and also move forward expeditiously with the process of emerging from bankruptcy. Although the tender offer allowed the city to sidestep a decision on this debt from the bankruptcy judge, and thus avoid the setting of any precedents for the municipal market regarding the treatment of “secured” debts in a major bankruptcy, the agreement of creditors to tender nearly 30% of the debt indicated some concern that they would not be made whole across the board and accepting a known price now on a portion seemed prudent. According to Janney Capital Markets, the tender price Detroit is offering to existing water and sewer bondholders "is well below recent trading levels." The ultimate takeaway here is that a distressed issuer may have to file for bankruptcy and at that point anything can happen, so bondholders who are looking for principal preservation and liquidity would be wise to stay far away and understand the bonds they own.