CHICAGO — Detroit's restructuring plan illustrates the threat that unfunded pensions and health care benefits pose to the bond market, and bond insurers specifically, Moody's Investors Service said Monday.

Detroit emergency manager Kevyn Orr's plan to bring down the city's $15 billion of debt relies on wiping out nearly $11.4 billion of what the city defines as unsecured debt. That puts $650 million of general obligation bonds not backed by a specific revenue lien on par with $1.4 billion of pension certificates, $5.7 billion of unfunded other post-employment benefits and $3.5 billion in unfunded pension obligations.

Orr has stopped payments on all unsecured debt and proposed floating $2 billion of notes to pay off the $11.4 billion of debt on a pro rata basis.

The ratings agencies, including Moody's, have hit the city with a fresh round of downgrades after the default.

"While we acknowledge that the EM's restructuring proposal is just an opening move in what is likely to be a protracted process, it highlights the threats posed by unfunded pension and OPEB liabilities to bond insurers and municipal bondholders more broadly," Moody's said in a comment Monday.

"The proposal's failure to provide enhanced recoveries for the unlimited tax GO bonds relative to less protected obligations, such as GO limited tax, [pension certificates], unfunded pensions and unfunded OPEBs, is certain to be a point of contention during future negotiations with the city," Moody's said.

Nearly all of Detroit's bonds carry insurance from six insurers. Assured Guaranty Municipal Corp. and Assured Guaranty Corp. have a combined $321 million exposure to Detroit GO bond debt and National Public Finance Guarantee Corp., a subsidiary of MBIA Inc. wraps $100 million of, according to Moody's.

Insurers face "significant losses, with loss severity in excess of 80% of par value" under Orr's plan, Moody's said.

"A key tenet of the municipal bond insurance business model has been both the low historic frequency of default as well as low loss severity given default," Moody's said. "The magnitude of Detroit's proposed haircut to unsecured bondholders owing to the inclusion of pension and OPEB liabilities on a pari passu [proportional] basis with GO bonds is a risk for bondholders and financial guarantors."

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