An insurance company that backs more than $170 million in Detroit bonds
said it opposes emergency manager Kevyn Orr's attempt to restructure the city's
finances, a rejection appearing to place the city one step closer to the largest
municipal bankruptcy in U.S history.
Ambac Assurance said in a written statement Monday night that it does not agree with Orr's plan to treat general obligation bondholders the same as unsecured creditors.
The company didn't say what it plans to do next. But it did announce the hiring of Harrison J. Goldin of Goldin Associates. Goldin is a former New York City comptroller who played a key role in New York's financial restructuring in 1970s.
The insurer said Orr's proposal "is harmful to Detroit and the interests of taxpayers in Michigan" because it would threaten the city's ability to obtain affordable bond financing in the future.
"The State of Michigan is making a grave error," Goldin said in the statement. "The revitalization of Detroit depends on its ability to re-access the credit markets in order to finance critical improvements to its infrastructure."
Ambac's statement comes just a few days after Orr directed the city to sue a debt insurer trying to block Detroit from accessing casino revenues.
Some say bondholders are gearing up for a big legal fight that could catapult the city into federal bankruptcy court.
In his proposal to restructure the city's finances, Orr is offering pennies on the dollar to the city's unsecured creditors. He defined general obligation bondholders as unsecured but said the bondholders will get a better deal if they come to the bargaining table instead of waiting for bankruptcy.
That move outraged many bondholders who have long believed that general bond obligations carry greater value than traditional unsecured creditors.
Orr spokesman Bill Nowling disputed the suggestion that general obligation bonds are secured investments.
"There's no legal requirement or precedence really to give them senior secured status over unsecured debt," Nowling said Monday night. "I know that's happened previously, but there's nothing in the structure of the debt that requires it."
Bondholders have typically argued that when a city gets into financial distress, it should raise taxes to pay its bond obligations. But Orr is arguing that the city has reached the state's effective tax limit.
"We cannot do that, and we're capped out," Nowling said.
Ambac said it insures $92.7 million in Detroit limited tax obligations and $77.6 million in unlimited tax obligations. If those bonds are reduced in value in bankruptcy court, the insurer would be forced to pay bondholders, which is why it is fighting Orr's plan.
Ambac also criticized Gov. Rick Snyder for signaling his support of Orr's plan. Some experts say that the state's decision to back Orr's plan could increase borrowing costs for other Michigan cities because it would indicate that general obligation bonds do not enjoy as much legal protection as previously believed.
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