Municipal bond industry sounds alarms over Detroit debt
WASHINGTON, July 19 (Reuters) - The largest municipal bankruptcy filing in U.S. history by Detroit poses threats to both investors, who could have to take big losses, and cities throughout the state of Michigan, who will likely have difficulties borrowing, a major industry group said on Friday.
In a letter to Michigan Governor Rick Snyder and Treasurer Andy Dillon, the Securities Industry and Financial Markets Association (SIFMA) said actions "relating to Detroit's outstanding municipal securities obligations could have potentially significant, negative municipal securities market implications, and could increase the cost of borrowing for all Michigan municipalities."
SIFMA, which represents hundreds of securities firms, banks and asset managers in the $3.7 trillion market, said it sent the July 18 letter to "implore" state leaders to "be sensitive to the potential impacts of your actions" on investors, cities and taxpayers.
By early Friday morning, yields in the secondary market for municipal debt were climbing, according to a preliminary read of Municipal Market Data's scale of highly rated debt. .
Even before the city took the first step toward Chapter 9 bankruptcy protection late on Thursday, it had skipped paying some of its debt service and defaulted on certificates of participation.
With its Emergency Manager Kevyn Orr discussing more tough decisions ahead for the financially crippled motor city, investors and Detroit's municipal employees are worried they will have to take huge losses.
SIFMA especially warned against lumping general obligation bonds - which are backed by the city's full faith and credit and guaranteed by the state's constitution - with other unsecured contractual obligations, namely certificates of payment.
"We believe any such treatment will have a long lasting negative impact on the ability of Michigan's municipalities to obtain financing on favorable terms," it wrote.
It also noted that the largest city of any state has never filed for bankruptcy, and other states have "considered various alternatives to aid distressed municipalities, including enacting laws regarding local government debt, to ensure that the markets' perception of what investors are due matches the outcome."
While Snyder has given his approval for the city to file as required by Michigan law, and said bankruptcy provides the best hope for recovery in the once-booming industrial town, a judge must now decide if the city can enter bankruptcy. Already, unions are challenging the petition and investors, lawyers and employees expect a legal fight.