The stream of analysts blasting Detroit’s proposed treatment of creditors summarized in 3 words: This is unprecedented! Yes. But is it fair?
— Nathan Bomey (@NathanBomey) February 24, 2014
Detroit’s proposed treatment of general obligation bondholders has turned muniland upside down. Here is what Fitch Ratings says:
Fitch Ratings believes the recent Detroit plan of adjustment filed with the Bankruptcy Court on Friday, Feb. 21, 2013, if confirmed, would set a troubling precedent in the municipal market. The plan not only classifies unlimited tax general obligation (ULTGO) bonds as ‘unsecured,’ but further degrades ULTGO value by giving other similarly classed ‘unsecured’ creditors preferential treatment, including unfunded pension and retiree health care liabilities.
The treatment of ULTGO bonds was argued last Wednesday. The city argued that the bonds were unsecured and that “there is no lien, there is no property interest, these creditors are like all others.” In other words, the bonds were unsecured. The city followed this court argument with a radical proposal to cut repayment for these bonds to 20 percent. Fitch goes on to say:
The city’s choice to treat ULTGO bonds as unsecured is particularly concerning, as they are backed by a separate property tax approved by the voters for the sole purpose of paying debt service on the bonds.