CHICAGO – Chapter 9 is supposed to make it easier for a struggling municipality to borrow, but the decisions made so far by Detroit’s leaders may have the opposite effect, bankruptcy expert James Spiotto said Friday at the Bond Dealers of America conference here.

Detroit emergency manager Kevyn Orr’s pre-bankruptcy decision to propose a draconian restructuring plan that gives unsecured creditors only pennies on the dollar was part of the “Kabuki theater” that is Chapter 9 -- a lot of sound and fury with uncertain consequences, said Spiotto, an attorney Chapman and Cutler LLP, during a Friday morning talk on the policy implications of Detroit’s bankruptcy.

The move alienated creditors, he said, and Orr may have been better off unveiling a comprehensive recovery plan outlining the city’s future.

“It’s hard to get people to sign up for nothing or less,” Spiotto said. “You should start out with a recovery plan. We don’t have a viable recovery plan [in Detroit] that people are signing up for, so now there’s all sorts of disputes and debates.”

Orr’s treatment of the city’s general obligation bonds as unsecured and its plan to restructure its secured water and sewer debt also do not bode well for future market access. It also shows the need for greater precision over general obligation bond language, Spiotto said.

“Maybe things got a little loose, and maybe we have to go back and make sure the language is there, tighten things up,” he said. “We can’t use Chapter 9 to create a situation where we put the market in turmoil.”

Orr’s plan to refinance the water and sewer debt under a new bond indenture to allow for the creation of a regional water authority runs counter to the historical treatment of special revenue bonds, Spiotto said.

“Special revenue [bonds] were a way of guaranteeing that even the poorest municipality in the worst shape can borrow money if they have a pledgable source of revenue,” he said. “The benefit of the bargain is to remain unimpaired …. Those little nicks have consequences.”

The decisions Orr and the state made leading up to the filing likely will mean a longer, bloodier battle with its creditors despite efforts by the federal judge to keep the case on a fast track.

“People are going to wear themselves out and at the end of the day everybody will be tired enough to realize that we’re all in it together,” Spiotto said.

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