CHICAGO — Detroit's historic bankruptcy filing may lead to precedent-setting decisions on the treatment of general obligation bonds and other debt, though it has not meant big changes in daily investment strategy so far, according to a pair of market participants at the Bond Dealers of America conference.
"The Detroit bankruptcy doesn't have a tremendous impact on our daily investment decisions," Benjamin Schuler, Managing Director of Research, Municipals, Fidelity Investments, Fixed Income Division, said Thursday at buy-side panel. "There are so many municipal credits, and Detroit is not like most of them relatively unique," he said. "Detroit is a sad, long-coming event that didn't surprise us."
Thomas Spalding, senior vice president, portfolio manager at Nuveen Asset Management, who agreed that the city's filing, which is the largest municipal filing to date, hasn't had a big impact on the firm's daily strategy, said he's keeping a sharp eye on how bonds are treated in the case.
"How the general obligation debt and various tiers of debt are handled through the emergency management process is very interesting and very telling," Spalding said. "If indeed there is an adverse ruling [against GO bondholders], that will have a negative impact on issuers in the state and the state itself."
Detroit's emergency manager Kevyn Orr, with the support of Gov. Rick Snyder, has proposed treating the city's unlimited-tax general obligation bonds as unsecured, on par with pensions and retiree health care obligations. Orr has proposed issuing $2 billion to pay off $11.5 billion of unsecured creditors.
The money the city may save over the short-term with such a treatment could raise borrowing rates for local Michigan issuers and the state itself for years to come, Spalding said. "We're looking at it with great interest."
So-called crossover buyers like hedge funds have played a key role in buying debt from Michigan issuers since the July filing, which rattled many traditional buyers, Spalding said.
"It's very interesting where demand has developed in the secondary market," he said. "We're glad to see any demand no matter where -- it's been very help in the last several months."
But "crossover buyers can become crossover sellers," Spalding added.
Schuler said the firm's municipal research division has long been careful about places a value on local government general obligation bonds that do not feature a statutory lien. But the Similarly, the firm considers Detroit's nearly $6 billion of water and sewer debt to be safer, and is closely monitoring the treatment of the utility debt in the bankruptcy case.
"The legal protections of the water and sewer bonds were designed for this precise situation; designed with protections we think should survive any a bankruptcy," Schuler said. "There's lots of utility debt out there, and depending on how the water and sewer debt legal protections are treated, this could clearly have an impact going forward."
Schuler added that the city's bankruptcy has helped bring to light the importance that pension and other post-employment benefit liabilities play in municipal credit analysis. "The value of sound municipal research in five years has grown tremendously in value across the industry over the past five years."
Spalding said he is closely watching the role played by the bond insurers who wrap nearly all of Detroit's debt.
"We expect insurers' interests to be aligned with the bondholders," Spalding said. He expects insurers' "conversations" with the city to be "fruitful and protecting bondholder interests."
