Managers of the municipal bond funds with the most Detroit paper said their investors are standing pat after the city’s historic bankruptcy filing last week.
“We’re not seeing any broad panic at all,” said Peter Hayes, head of municipal bond portfolio management, trading and research at Blackrock, which manages four of the 10 closed-end funds with the heaviest concentration of Detroit debt as a percent of individual fund holdings at their respective portfolio dates.
“I think [clients] realize it’s going to be a long, protracted battle. So we’re seeing everybody just willing to hold right now.”
Hayes and other fund managers said clients have lodged more queries about the overall health of general obligation paper and what the filing means for the muni market at large than about divesting their money of any association with Detroit -- or even Michigan-related debt.
Many of the mutual funds that hold sizable amounts of Detroit paper took “preventive measures” by selling the city’s general obligation bonds in the months and in some cases years before the bankruptcy filing, they said, and by explaining to investors early on how the city’s troubles could lead to a bankruptcy filing and what that would mean to any of their remaining investments.
The BlackRock MuniYield MI Quality Common fund ranks first among the 79 closed end municipal funds with the most exposure to Detroit, with 18% of its holdings in the city’s paper. The investor, whose exposure to Detroit consists overwhelmingly of water and sewer revenue bonds — as is the case with most large mutual fund investors — has conveyed to clients that the bankruptcy won’t be resolved quickly, Hayes said. BlackRock’s exposure to the limited-tax GOs is approximately one half of 1% of the portfolio, as part of its high-yield positioning.
Detroit emergency manager Kevyn Orr said before the city filed for Chapter 9 protection Thursday that the city is treating its limited and unilimited tax GOs as unsecured debt, except those GOs backed by liens on state aid. In 2010, Michigan amended a law that, in effect, secured a portion of Detroit’s limited-tax GO debt backed by state aid payments with a statutory lien and intercept feature that attorneys argued would likely protect the bonds in the case of a Chapter 9.
Among the 79 top U.S. closed-end municipal funds weighted for their exposure to Detroit GOs and revenue bonds, 73, or 92%, have lost value since the July 18 filing. At the same time, 62% of the 155 U.S. open-end municipal funds weighted for exposure to Detroit GOs and revenue bonds lost value, according to Morningstar.
OppenheimerFunds Rochester Muni Group, which manages the top-ranked open-end fund in Detroit exposure, would not comment on investors’ reactions beyond saying that its funds are well-placed to withstand Detroit’s filing, if approved. A spokesman said that 100% of the GO debt it owns is backed by a municipal insurer and its positions in Detroit water and sewer bonds — some of which are insured — are all secured obligations that Orr has stated will continue to be honored.
Firms with less exposure took steps to reassure investors. Vanguard told its muni investors in a statement it issued Friday that Detroit debt represents a tiny fraction of the entire $3.73 trillion muni bond market — at just 0.05%.
Vanguard investors should have little reason for concern from Detroit’s filing, it added, as the firm had anticipated the city’s insolvency. Its clients’ exposure to Detroit debt is minimal, Vanguard said.
It has five open-end funds listed among the top holders of Detroit debt weighted by exposure, but none ranked higher than 110th.
Detroit debt held among all of the firm’s national tax-exempt funds as of July 18 totaled $156.7 million, or just 0.16% of its holdings. And Detroit GOs comprise almost 24% of that total.
Thornburg Investment Management hasn’t yet seen much of a reaction from investors, said Chris Ryon, co-portfolio manager of muni funds for the firm. For its part, Thornburg doesn’t own any Detroit GOs, just water and sewer bonds.
Cash flows on Friday will paint a more accurate picture of investors’ reaction to Detroit, he said.
On Tuesday, bids on uninsured, limited GOs stood at 17 cents on the dollar, Ryon said, and with insurance they went from 79 to 72 cents on the dollar.
All unlimited GOs that are insured traded around 79 cents on the dollar Tuesday. Detroit certificates of participation traded about 40 cents on the dollar.
By comparison, Detroit water and sewer bonds traded around par Tuesday, Ryon said, plus or minus a shade.
“But our investors have been rock-solid,” he said. “We don’t see any panic in our separate account business, or anything like that. The whole Detroit thing, I’ve heard, is an 'idiosyncratic risk,’ and I have to agree with it.”
By the end of May, Wells Fargo Advantage Funds held $237 million in Detroit water and sewer debt. They don’t own unsecured GO debt, and haven’t for several years, a spokesperson said. It has three open-end funds listed among the top-20 holders of Detroit debt weighted by exposure.
Its clients are mostly institutions, she added, who understand the difference between GOs and those bonds funded by water and sewer revenues.
Clients of Samson Capital Advisors haven’t had any Detroit exposure since 2010, the firm wrote to investors in a bulletin. Before then, it had invested in secured Detroit water and sewer issues.
But in 2010, became concerned about the proximity of the water and sewer system to Detroit’s weakening financial position, it wrote. Still, Samson sought to assuage investor concerns about the financial health of other cities.
“While many state and local governments face challenges of the same type,” Samson wrote, “the magnitude and urgency of Detroit’s problems are unique, and the city’s situation should not be extrapolated to the rest of the municipal market.”