Regional News

Detroit to Default on Oct. 1 GO Payment

Correction: This article was updated to indicate the 2008 limited-tax GO bonds are not insured.

CHICAGO Detroit will default on its October 1 general obligation bond payments, making it one of the largest cities to default on such a payment since the Great Depression.

Emergency manager Kevyn Orr warned in June that the city would stop making payments on all so-called unsecured debt, so the move was not unexpected. But it will mark the city's first official GO bond default, on both unlimited-tax and limited-tax GO bonds. It will also make Detroit the largest municipality to default since New York City was late on a note payment in 1975, municipal market experts said.

Orr's spokesman Bill Nowling confirmed Monday that the city will default on the Oct. 1 payment in an email to The Bond Buyer. All the city's debt payments are on hold and "I don't expect it to change in the near future," Nowling said.

The default will spark at least one fresh downgrade, but will likely have little impact on the market, said one market participant.

"It should be a non-event," Triet Nguyen, a fixed-income market veteran who specializes in high-yield bonds and is president of Axios Advisors LLC. "It should not have an impact on trading levels or the market itself."

Richard Ciccarone, chief research officer at McDonnell Investment Management LLC, agreed that market impact will be minimal. The default will nevertheless test some of the most traditional beliefs in the municipal bond market, he said.

"Credit analysis can't assume that credits won't default because they're too big, which has been a longstanding belief," Ciccarone said. "The too big to default concept is being test here because it's such a large city."

The defaults also overturn the "sacrosanct" security of the unlimited-tax GO pledge, Ciccarone said. "There's been a belief that if the payments are not on time they will be paid at least eventually, which happened even during the Depression."

Orr has proposed issuing $2 billion of notes to pay off all $11.4 billion of unsecured creditors, including bondholders and retirees.

Nearly all of Detroit's GO debt is insured, much of it by Assured Guaranty, Ambac Assurance Corp., or MBIA Inc. The insurers have all pledged to make full and timely payments to bondholders if the city misses payments.

Detroit's only other default so far is a June 14 payment for $39.7 million due on its pension certificates. That came before the city's July 18 bankruptcy filing.

Detroit has continued to make payments on its interest-rate swaps, which it considered secured debt. Debt payments on its water and sewer bonds are also due Oct. 1, and the city is expected to make those payments, which are backed by water and sewer revenue.

The city owes a total $136 million in debt service payments in fiscal 2014, which started July 1. It owes another $63.2 million in principal and interest on the pension certificates. The city also plans to skip a $199 million pension contribution and a $141 million retiree health care contribution scheduled for fiscal 2014.

Detroit's payments on secured GO debt $440 million out of $1 billion totals $27 million in fiscal 2014, and just under $40 million through the next 10 years. Payments on the city's eight interest-rate swaps will cost $51 million a year, unless they are terminated.

One series of the city's unsecured GO debt feature a balloon principal payment due this year. The 2008 limited-tax GO bonds saw debt payments jump from $2 million in 2013 to $27 million in 2014. The bonds are not insured and mature in 2014.

The October default will mean a fresh downgrade from Fitch Ratings, which said last week it would push the junk-rated bonds to D if the city defaults.

Fitch currently has a C rating on the city's GOs with a negative outlook. Moody's Investors Service said its rating of Caa3 on the city's ULTGOs and Ca on the LTGOs and pension certificates already assume a default.

"The expectation is that while the city continues to work through the Chapter 9 process, GO, LT, and COPs bondholders will not receive debt service payments," Moody's analyst Genevieve Nolan said in an email. "Further, as the city continues through the bankruptcy process and negotiates with creditors, there is an ongoing potential for a settlement of a plan of adjustment that could result in significantly lower recovery levels than historical averages for GO, LT, and COPs bondholders."




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