Feb. 19--The city of Detroit today will defend its proposal to treat certain bondholders as unsecured creditors -- a strategy that has rankled Wall Street and could lead to increased borrowing costs for other municipalities.
Detroit emergency manager Kevyn Orr has proposed classifying general obligation bondholders as unsecured creditors, including owners of debt paid with taxes that were approved by voters for various infrastructure projects.
The dispute does not involve secured bondholders, including water and sewer debt holders that are likely to be paid in full.
The city is effectively arguing that Detroit's pledge to use its "full faith and credit" to pay general obligation bondholders was severed when the city filed for Chapter 9 bankruptcy in July.
But the bondholders are angry that Orr has redirected dedicated revenue from bond payments to improve services, such as police, fire and blight removal.
Several bond insurers -- which agreed to back the Detroit bonds and must now make payments to bondholders, following the city's debt defaults -- are battling the city's decision. They have asked Judge Steven Rhodes to force the city to pay up.
The insurers, including Ambac Assurance and National Public Finance Guarantee Corp., will make arguments in a court hearing that starts at 10 a.m.
Detroit's strategy uproots the traditional mindset in the municipal finance community, which has long regarded municipal debt as safer than other unsecured claims.
Several analysts have said that if Rhodes allows Detroit's strategy, banks could raise borrowing costs for other municipalities under the premise that the quality of this type of debt has decreased.
"The impact would be felt most sharply by local governments soliciting fresh capital from municipal market lenders," Municipal Market Advisors wrote in a briefing Tuesday. "In this light, we are bewildered that other states and local governments outside of MI have not publicly weighed in or filed related briefs with the court."
Also during today's hearing:
--Judge Rhodes will consider the city's request to disband a committee of unsecured creditors that the city argues is no longer necessary. The city says all major creditor groups are adequately represented in some capacity in the case.
--Judge Rhodes will consider a request by the city's retiree committee to purchase insurance to protect committee board members against lawsuits.
--Bond insurer Syncora's dispute with two banks that own Detroit swaps will be discussed.
Contact Nathan Bomey: 313-223-4743 or firstname.lastname@example.org. Follow him on Twitter @NathanBomey.
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