Fitch: Detroit's Treatment of Bondholders Strains Boundaries of Creditor Expectations

NEW YORK--()--Link to Fitch Ratings' Report: Rating to Bondholder Security After Detroit http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747280

While Detroit's agreement with bond insurers treats the unlimited tax general obligation (ULTGO) bonds closer to Fitch's expectations than those the city proposed, bankruptcy treatment of the utility bonds and the city's suit to invalidate certificates of participation (COPs) challenge traditional rating distinctions linked to bondholder security, according to a new Fitch Ratings report.

'Most Detroit bondholders are left vulnerable. If special revenue bondholders are impaired as proposed, or the city's suit to invalidate the COPs is successful, there could be a roadmap for a legal strategy in a limited number of other cases,' said Amy Laskey, Managing Director, U.S. Public Finance.

The agreement on the ULTGO bonds stipulates even more substantial impairment for LTGO bondholders. Holders of pension certificates of obligation may get a very low recovery at best. Even bonds secured by 'special revenues' may be at risk.

Maintaining or restoring essential services should be expected to trump attention to security distinctions when a municipality is distressed to the point of bankruptcy. Rating distinct security structures at levels without any direct linkage to the ULTGO debt will make sense only when that security reflects impregnable legal protection.

It remains to be seen whether special revenue status, which could include a statutory lien on dedicated tax revenues, affords that kind of protection. The proposed impairment of the utility debt in the PPOA suggests it may not.

The city is challenging the validity of the COPs it issued to provide funding for pension plans in the mid-2000s. Should the city prevail, the decision will suggest a legal theory to attack certain other nontraditional securities used by municipalities in order to avoid adherence to legal requirements related to debt issuance. Fitch believes most of the commonly used structures are better positioned to survive such a claim.

For more information, a special report titled 'Rating to Bondholder Security After Detroit' is available on the Fitch Ratings web site at www.fitchratings.com, or by clicking on the link above.

Additional information is available at 'www.fitchratings.com'.

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Contacts

Fitch Ratings
Adrienne Booker
Senior Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Media Relations
Elizabeth Fogerty, New York
+1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Adrienne Booker
Senior Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Media Relations
Elizabeth Fogerty, New York
+1 212-908-0526
elizabeth.fogerty@fitchratings.com