CHICAGO -- Detroit's proposed settlement with its unlimited-tax general obligation bondholders is a positive development for the bondholders and insurers that wrap the debt, Moody's Investors Service said in a comment released Monday.

The city last week announced it had reached a deal with the three bond insurers that insure most of its ULTGO debt. Assured Guaranty, Ambac Financial Group, and National Public Finance Guarantee Corp. would recover 74% on their claims, up from the city's most recent offer of 15% recovery.

Detroit would also treat the debt as secured, marking a reversal of its position that the debt is unsecured, and attach an additional lien of state aid to the bonds.

The insurers agreed that the 26% haircut could be used to set up a fund for the city's lowest-income pensioners.

"If approved by the bankruptcy court, the better settlement would reflect bond insurers' effective negotiations with issuers and other creditors to mitigate losses," Moody's analyst Genevieve Nolan wrote in the comment. "The significant increase in recovery for the financial guarantors relative to earlier offers from the city and the recovery of claims payments made on omitted interest payments on the reinstated bonds are positive credit developments."

But uncertainties remain, Moody's noted. The deal still needs to be approved by the bankruptcy court as part of the city's overall plan of debt confirmation. The court must also approve the diversion of 26% of the dedicated property tax levy. The settlement would resolve only $388 million out of a debt liability the city puts at $18 billion, and the city still faces significant negotiations with other creditors, Moody's said.

It's also unclear how the deal might affect the city's other creditors, including limited-tax GO holders, pension certificate holders, and retirees.

"This settlement is one small piece of a much larger overall plan of adjustment," Nolan wrote. "Should the court decline approval, then the agreement will be moot and litigation on the issue of GOULT's secured status may resume."

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.