CHICAGO — Bond insurers that wrap Detroit's unlimited tax general obligation bonds have been ordered back into mediation with the city.

U.S District Chief Judge Gerald Rosen, who is overseeing mediation in the Chapter 9 case, issued the order Thursday.

The filing requires MBIA/National Public Finance Guarantee Corp., Assured Guaranty Municipal Corp., and Ambac Assurance Corp. to meet Monday morning with the city for continuing mediation.

The insurers should bring along their attorneys, financial advisors and any other representatives with "full and complete settlement authority," Rosen wrote in the order.

The bond insurers have sued the city to overturn its effort to treat the ULTGOs as unsecured.

U.S. Bankruptcy Judge Steven Rhodes, who is overseeing the case, heard arguments from both sides on Feb. 19. Rhodes said he would issue a written ruling on the matter in "two or three" weeks, but urged the parties to reach a settlement before that. The debate over the city's unlimited-tax GO bonds is closely watched in the municipal bond market. If Rhodes agrees with the city that the debt is unsecured, it could drive up borrowing costs across Michigan or beyond, and overturn the traditional belief that unlimited-tax GOs are among the safest investments.

The city argues that the ULTGOs are not secured by any lien or pledge that would survive federal bankruptcy, despite a property tax levy approved by voters specifically for the GO debt payments.

The monolines argue that bondholders have a property interest in the tax revenue raised under the voter-approved levy, which is equal to a grant of property, and that the tax revenue is essentially is a special dedicated revenue.

State law requires that the revenue be used only for debt service on the bonds, and prohibits the city from using it for any other purpose, the insurers argue.

Rhodes noted in the Feb. 19 hearing that nothing in Michigan law specifically says the bondholders have a lien or a security interest in the revenue. He ordered that without a settlement, his ruling was likely to be all or nothing for one side.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.