CHICAGO -- The potential treatment of pension debt as being on par with bond debt is among the most important lessons to be learned in Detroit's bankruptcy so far, according to Standard & Poor's.
"All politics is important and it plays a role in recovery," analyst Rad Lukic said Wednesday in a webinar the firm hosted on lessons learned from Detroit a year after the city filed for bankruptcy. "'Main Street' factors should be considered when conducting your recovery analysis."
Detroit's settlements with its general obligation bondholders, which call for a 26% haircut for unlimited-tax GO holders and a 66% haircut for limited-tax GO holders, compared with smaller cuts for pensioners, could influence the way other distressed issuers prioritize their own debt, analysts said.
"It's brought out a good dialogue on how pensioners are treated over bondholders, and the contrast in this case is pretty stark," Ridley asked. "The question is, is it going to inform the actions or conversations going forward for other distressed issuers?"
The largest municipal bankruptcy filing in the U.S. is not likely to spark other bankruptcies or defaults, analysts said. But it has created a more uncertain environment for muni bond holders, especially when it comes to recovery rates.
"The biggest lesson learned is that in a recovery scenario, governments are increasingly forced to choose between essential services and honoring their debt obligations," Lukic said. "The recovery analysis needs to be flexible enough to capture all the nuances of legal and even political [factors] that impact recovery prospects."
Investors should closely consider the fundamental economic condition of a credit and whether the issuer is located in a state that provides a statutory lien on GO bonds, analysts said.
Market appetite for Detroit's debt persists despite its default and controversial treatment of its bond debt, Ridley said, citing investor interest in $185 million of bonds floated by the city's new Public Lighting Authority as well as Barclays' ability to re-sell $120 million of a debtor-in-possession loan. "I had very few investor questions on [the PLA deal], which was surprising," she said. "It's indicating that there are buyers out there looking for that yield."
Detroit's bankruptcy has not yet formally altered the way in which Standard & Poor's rates bonds, though it could have an impact on the market risk profile of municipal GO bonds in the future, Ridley said.
