CHICAGO — "Aggressive," "precedent-setting" and "unconventional" are a few of the words analysts used to describe Detroit emergency manager Keyvn Orr's restructuring plan, largely because it puts its voter-approved unlimited-tax general obligation bonds on par with other unsecured debts.
Municipal Market Advisors, in a report Monday, said if the city's move to treat all unsecured debts the same is successful, "market participants may need to ignore future claims of structural superiority for general obligation issues in the state and should demand a relatively higher yield for Michigan GOs versus, for example, New Jersey GOs."
Orr unveiled the 134-page restructuring report Friday and announced a moratorium on debt payments on its unsecured debt. It missed a $39.7 million payment on pension certificates due Friday.
Moody's Investors Service Monday called the city's default and its restructuring plan a credit negative.
"The restructuring plan is unconventional and precedent-setting in the municipal market," analyst Hetty Chang wrote in a comment. "The plan appears to treat the general obligation and pension obligation certificates similarly, which would be a break from tradition."
Orr's plan is "an aggressive stance," MMA said. "It assaults the long-established market practice of ascribing incremental value (pricing, rating) to the 'stronger' pledges (in particular the unlimited general obligation pledge)."
Orr has proposed issuing $2 billion of limited-recourse participation notes to pay off holders of $11.4 billion of unsecured obligations — those not secured by a specific revenue — on a pro rata basis. The unsecured obligations include more than $9 billion in pension and retiree healthcare obligations. Most of the remaining balance is bond debt.
Moody's says the proposal may just be an opening bid, but that the magnitude of the proposal, coupled with the city's "comprehensive case for insolvency suggests substantial losses to creditors either through restructuring or Chapter 9."
Payments on the city's secured debt are "subject to negotiation," according to Orr's report.
MMA says Detroit's default is not surprising given its long slide into insolvency, and that it does not necessarily portend a wave of local government defaults.
But Orr's plan is part of a trend of a more aggressive treatment of bondholders, who should lower their expectations for post-default recoveries, MMA said.
It also shows how issuers are more willing to take on bondholders as representatives of Wall Street, analysts said.
"Because there is no reason to expect state and local revenues will soon begin generating large surpluses, or that public employee benefits will no longer draw fire from taxpayers and pundits alike, municipal investors should hereafter assume that their relationship with a distressed issuer, once broken, will be difficult if not impossible to repair," MMA said.