Moody's Sees Detroit Certificate of Participation Debt Repudiation as Isolated

The Bond Buyer reports:

Detroit's attempt to invalidate $1.4 billion of pension certificates as part of its bankruptcy is a "radical" move that is unlikely to be copied by other issuers even if successful, according to Moody's Investors Service.

"The attempted repudiation of municipal debt is an extremely rare and unusual act," Moody's said in a comment released Friday titled "Desperate Times Call for Desperate Measures: Detroit's Attempted COPs Repudiation an Extreme Act."

"Ultimately, the city's repudiation attempt is unlikely to impact the broader municipal market because it is so rare. Should the city prevail, the case is still likely to have limited implications for COPs holders elsewhere," analysts wrote.

Detroit filed the lawsuit challenging the certificates of participation on Jan. 31, arguing that the debt structure, which relied on service corporations, is illegal because it was set up solely to allow the city to avoid state debt limits.

The lawsuit is part of the city's ongoing effort to settle with its swap counterparties, who hedge $800 million of the COPs.

If the city wins in court, it could be positive for other creditors because it would mean more money to go around, Moody's notes.

But it's also possible that the city could be made to return the proceeds of the $1.4 billion sale, which were used to fund its two pension systems. That would severely weaken the pension funds' assets and could roil the bankruptcy case.

An article well worth your time.