City Journal reports on bending down and taking it hard:
When emergency financial manager Kevyn Orr filed his plans in late February to lift Detroit out of bankruptcy, his proposals drew fire from the municipal-finance industry. Investors, bond insurers, ratings analysts, and industry groups all balked at his terms. That’s not surprising, since Orr, a private-sector restructuring expert, has used the Detroit bankruptcy to try to overturn years’ worth of precedent in municipal finance.
There's more:
Meanwhile, Orr is offering city workers and retirees greater rates of recovery than bondholders, even though retirees are traditionally considered unsecured creditors in bankruptcies. Orr would use several hundred million dollars pledged by private groups to reinforce Detroit’s pension funds—money that the groups would not allow the city to pay to bondholders. This plan is upsetting the municipal market, too. “While we understand that favoring pensioners and discriminating against bondholders might be politically popular, we believe this is contrary to bankruptcy law,” a spokesman for the city’s largest unsecured creditor, Financial Guaranty Insurance Co., told the press. But bondholders shouldn’t be so surprised that the landscape is changing. Warnings that growing state and city retirement obligations are a threat to municipal investors have started to circulate. Last October, for example, former New York lieutenant governor Richard Ravitch told investors at a municipal-finance conference in New York that no distinction existed between the obligation to pay bondholders and pensioners, and no process was yet in place for deciding who gets paid back in a bankruptcy involving such competing interests.
Detroit is already the largest municipal bankruptcy on record. Orr’s stance toward the city’s debt also makes the case one of the most troubling ones yet for municipal investors.
Just a reminder to municipal bond holders.
