Over the years, Detroit's financial deterioration and the city's downturn have been well documented, so its bankruptcy filing came as little surprise to most market participants. This point can be reinforced by Interactive Data's analysis below of six different bonds issued by Detroit and related entities, which are representative of the types of debt and structures Detroit has issued. These bonds include tax-exempt and taxable, fixed rate and floating rate, insured and uninsured, unlimited tax general obligation (ULTGO), limited tax general obligation (LTGO), water and sewer revenue, and pension obligation certificates of participation (COPs).
As our data illustrates, the decline in evaluated pricing for the Detroit bonds has been gradual, with the exception of two types of bonds LTGO and Taxable Pension COP (represented by 251093Q29 and 25113PAN5, respectively). These two bonds saw considerable declines following the release of the emergency manager's (EM) proposal in mid June and the subsequent bankruptcy filing nearly one month later.
Interactive Data's evaluated prices on these two bonds dropped based on trade data and/or market color (such as bids and offerings). LTGO 251093Q29 is an uninsured limited tax bond and Detroit cannot raise taxes any higher to support this bond. Also, the EM and the State of Michigan want to treat all GO bonds as "unsecured creditors" on parity with pension and OPEB liabilities. Taxable Pension 25113 PAN5 is insured by FGIC, but is otherwise unsecured and not backed by any dedicated revenue stream, taxes or collateral. It is too early to determine how these bonds will be treated in the Detroit bankruptcy.
The Detroit bankruptcy filing also needs to be considered in the context of a significant correction in the muni market which occurred following Ben Bernanke's comments on June 19 of this year regarding the possibility of the Fed beginning to taper its QE program. The muni market has been under pressure since that time, with other contributing factors, including the backup in UST yields and record outflows from muni mutual funds.
The attached chart (Declining Value) highlights Interactive Data's evaluated pricing for a selected sample of Detroit bonds. Interactive Data's bid-side evaluations are market based measurement that represent our good faith opinion as to what the holder would receive in an orderly transaction (typically in an institutional round lot position) under current market conditions.
Jon Barasch is Director, Municipal Evaluations and
Patricia McGuigan is Senior Credit Analyst for Interactive Data.
