CHICAGO -- Bond insurance is helping preserve the secondary market value of Detroit’s unsecured general obligation debt with the city poised Tuesday to officially default for the first time on its full faith and credit pledge.
Nearly all of the city’s GO debt carries insurance. The bulk of the GO debt that is not insured is backed by a pledge of distributable state aid, which the city considers a secured obligation and has said it will continue to make payments on.
Detroit was expected to skip its Oct. 1 payment on a chunk of unlimited-tax and limited-tax GO debt that Detroit emergency manager Kevyn Orr is treating as unsecured.
As of Tuesday afternoon, notice of the missed payment was not yet posted on the Municipal Securities Rulemaking Board’s EMMA web site. Detroit had, however, posted a notice that Fitch Ratings downgraded the city late Monday to D amid expectations of Tuesday’s missed payment.
Despite the widely expected default, many Detroit GO bonds that are enhanced with insurance traded in the high 90-cent on the dollar range in recent days.
A chunk of 2008 unlimited-tax GO term bonds insured by Assured Guaranty with a 2028 maturity sold Tuesday morning for 90 cents on the dollar with a 5.9% yield. The same bonds sold for 94 cents on the dollar with a 5.57% yield on Monday.
Limited-tax bonds lacking both insurance and a state aid pledge, however, were dramatically cheaper.
A piece of uninsured LTGOs issued in 2008 were trading for 34 cents on the dollar in late September, according to EMMA, down from about 50 cents on the dollar in late July trading, days after the city filed for Chapter 9.
The bonds were selling for 81 cents on the dollar in early June, two weeks before Orr announced plans to default.
The city only has about $75 million of LTGOs that lack both insurance and a state aid pledge.
Bonds that feature a pledge of state aid but have no insurance have continued to trade strongly throughout the city’s crisis starting last spring.
For example, a piece of the city’s 2010 taxable ULTGOs secured by state aid and with a 7.18% coupon and a 2022 maturity sold last week for 99 cents on the dollar with a yield of 7.28%.
The same bonds sold at a premium, for 101.2 cents, last week.
State aid-backed ULTGOs with a 2035 maturity and 8.36% coupon on Monday yielded 8.2% and selling for 101 cents.
Limited-tax GO bonds issued in 2010 and backed by state aid, with a 5% coupon and 2030 maturity, sold last week for 94 cents on the dollar with a 5.5% yield.
In general, trading on Detroit bonds was minimal Tuesday, with only a handful of odd-lot sales reported, according to Interactive Data.
In other Detroit news, a date has been set for the court questioning of Gov. Rick Snyder about the city’s move to file for bankruptcy. The deposition, scheduled to last three hours, will be one of the most closely watched developments in the case so far.
Snyder will be deposed the morning of Oct. 9. The deposition will be led by attorneys for the city’s unions, who say they need to question Snyder and other top state officials about the decisions leading up to the city’s bankruptcy filing. Treasurer Andy Dillon and Snyder aide Richard Baird will be questioned on Oct. 10.
On Tuesday, the state announced it planned to lease Detroit’s popular Belle Isle park from the city. A previous deal, before the city was under emergency management, was abandoned after the City Council refused to sign off on it. The park, one of the nation’s largest city-owned parks, will become the state’s 102 state parks under the new deal, which will last for 30 years with two renewal periods. The City Council has 10 days to approve or reject the lease, and if it rejects it, has seven days to come up with an alternative way to save the same amount of money.
The state will not pay the city any money to take over the park but will take over annual operating expenses, estimated at between $4 million to $6 million. The state will invest up to $20 million during the first three years. Residents will have to pay an annual per-car fee of $11 to use the park.
