CHICAGO — The federal judge overseeing Detroit's historic bankruptcy will rule on the city's plan of adjustment Friday, capping one of the municipal market's most closely watched cases.

U.S. Bankruptcy Judge Steven Rhodes is set to rule at 1 p.m., EST, on whether he approves or disapproves the city's plan to shed $7 billion of debt, restructure operations, and reinvest $1.7 billion back into the city.

The plan features settlements with all of the city's major creditors, which increases the likelihood of confirmation. Rhodes' ruling is expected to center on whether the strategy meets the bankruptcy code's key benchmarks of being fair to creditors and feasible to implement.

Because Detroit settled with nearly all of its creditors, the largest municipal bankruptcy filing in the U.S. has so far not set legal precedents. But for the muni market, one of the most salient themes remains Detroit's decision to give higher recoveries to its pensioners than its bondholders.

Coupled with similar decisions by other bankrupt cities, including Stockton, Calif., many muni observers say politics can be as important as legal considerations in a high-profile Chapter 9 case like Detroit.

"[P]ensions should be considered a priority obligation and OPEBs should no longer be considered a 'lesser' obligation," Municipal Market Advisors wrote a recent comment after the confirmation of Stockton's plan. "Both demand to be formally factored into traditional credit analyst metrics and rating decisions."

Without a court fight on the issue, legal clarity remains uncertain, said Alan Schankel, with Janney Capital Markets, in a recent fixed-income weekly outlook.

"No issue looms larger than determining the balance between the rights of bondholders and pension beneficiaries, and although this balance was addressed in the cases of [Detroit and Stockton], the resolution is anything but clear," Schankel wrote.

Immediately following his ruling, Rhodes will hold a status conference hearing on the implementation of his order.

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