The Municipal Securities Rulemaking Board said Monday that in the wake of Detroit’s bankruptcy filing, investors need to be mindful that not all general obligation bonds carry the same level of security in the event of issuer insolvency.
Though the MSRB does not regulate issuers or have any control over state and local contract laws, the board is interested in the rights of bondholders, said MSRB executive Director Lynnette Kelly said when asked about Detroit.
Detroit’s effort to treat GO bondholders as holders of unsecured debt highlights the need for investors and market professionals to understand that the strength of the GO pledge might vary from jurisdiction to jurisdiction, she said. Detroit emergency manager Kevyn Orr’s restructuring plan treats the city’s unlimited-tax GO bonds as on par with unsecured debt such as retiree health care benefits.
“Not all bonds that are labeled ‘general obligation’ carry the same level of security and therefore might be treated differently in the event an issuer faces insolvency,” said Kelly. “Investors and market professionals need to understand the precise nature of the pledge behind a general obligation bond and that the pledge may differ from issue to issue depending on the wording of the pledge and on potential differences in state and local laws.”
The MSRB’s statement comes the same day that both Fitch Ratings and Moody’s Investors Service said the ultimate outcome of the case could affect their rating analysis going forward. A bankruptcy judge would have to sign off on Orr’s plan.
The Securities Industry and Financial Markets Association urged Michigan Gov. Rick Snyder in a letter last week to uphold the city’s ULTGO bond pledge, warning him that treating them as unsecured could have a huge adverse ripple effect in the muni market.
