CHICAGO - Detroit's revised bankruptcy debt plan, which proposes even lower recoveries for creditors than its original proposal, is a harsh reminder that even bonds with strong security pledges will suffer when economic conditions are too bad, said Moody's Investors Service.
"Detroit's harsh proposal is a reminder that post-default recoveries for bondholders are likely to be especially low when a defaulter's economic base is depressed or declining," Moody's analyst Genevieve Nolan wrote in the report, "Detroit Turns the Screw: City Proposes Even Worse Recoveries for Creditors."
"Security standing is a key factor, but even bonds supported by strong security pledges will suffer losses when economic conditions become overwhelmingly negative," Nolan wrote.
Detroit released the revised plan of adjustment on March 31. The city now proposes repaying general obligation bondholders 15 cents on the dollar, down from the 20 cents on the dollar the city proposed in its first bankruptcy plan in February.
The amended plan reflects the city's continued "tough stance" towards creditors, Moody's said.
Moody's notes that the city wants to reward those creditors who help expedite the bankruptcy process, and punish those who continue to challenge it. The city's negotiating position, however, could be "eroded" by upcoming litigation, including whether the expected court decision on whether the city's general obligation bonds are secured.
"GO creditors would likely receive higher recovery rates than what the city is offering if the court rules that the GO bonds are secured," said Nolan. "Mediation between the city and insurers of the GO bonds resumed in an effort to reach a settlement, possibly precluding the need for the court to rule."
The revised plan says police and fire pensioners will see a 94% recovery - not including the elimination of future cost-of-living increases - if they agree to settle quickly, compared to 86% recovery if they continue to challenge. That's down from 96% and 90% respectively, in the February plan.
The new plan also features a new schedule of coupon reductions for water and sewer bondholders who do not approve the plan, but otherwise has no major changes from the February plan, according to Moody's.