Detroit Bonds Downgraded to Junk Status

[Det_ard]

Another rating agency downgraded $2.5 billion in Detroit bonds to junk status. That triggered a "termination" event related to swap agreements on the Pension fund bonds that will cost the city an additional $50 million per year for the next seven years. That's money the city won't have to light streets, pay cops or firefighters, or keep rec centers open.

Way to go knuckleheads on Council, in the Mayor's office, and the grape-throwers who are standing in the way of the State. By the time you're done "protecting" the city's jewels you'll be in hock so deep you'll have to pawn them all.

http://www.marketwatch.com/story/fit...ive-2012-03-22

[Flintoid]

The city government has been in junk status for quite some time. This is just a reminder of how we need to get our act together and quick. Whether Bing and the council agree or not, the Governor has the final say here and a year from now we will have made alot of progress. Painful yes, but progress.

[Richard]

Now your going to open the door on the art thing again.

[Coaccession]

Now your going to open the door on the art thing again.

Bingo! At the rate the Mayor and City Council are racking up late fees and overdraft charges, though, even all the artworks up in the attic may not be enough to satisfy Detroit's creditors. It's too bad, Richard, that Antiques Roadshow didn't hit town a little sooner.

[Red Devil]

Hey where can I buy some of these junk bonds w/ swaps? I remember from 2008 that bondholders are always made whole. That Monet would look great in my living room...

[Gistok]

.... lol.... looks like I'll have to fight Lowell over Frederick Church's "Cotopaxi" painting....

LMAO over Richard's comment.....

Coaccession.... last time the Antiques Roadshow was here... they were in Oakland County... [[Southfield).

[adamjab19]

Buy low, sell high!

[Zacha341]

Well we do have alot of pawn shops waiting and ready....

By the time you're done "protecting" the city's jewels you'll be in hock so deep you'll have to pawn them all.

[Zacha341]

No body touches my beloved Cotopaxi! And yes parking is easier in Southfield relative to any Antiques Roadhouse... or Gilbralter Tradeshow anyone?

.... lol.... looks like I'll have to fight Lowell over Frederick Church's "Cotopaxi" painting....

Coaccession.... last time the Antiques Roadshow was here... they were in Oakland County... [[Southfield).

[JBMcB]

Hey where can I buy some of these junk bonds w/ swaps? I remember from 2008 that bondholders are always made whole. That Monet would look great in my living room...

It depends - see if you hold secured debt, and one of the unsecured debtors is a friend of the current federal administration like, say, the UAW, you get screwed and the UAW gets equity, even though the law says you should get paid first.

You could try suing the government for not following their own laws, but you can't sue the government unless they allow you, and in this case they won't.

The only way around this is a CDS, but the premiums on a CDS for Detroit debt would probably equal the value of the instrument, if anyone would sell you one at all, so it would be a wash.

[corktownyuppie]

It depends - see if you hold secured debt, and one of the unsecured debtors is a friend of the current federal administration like, say, the UAW, you get screwed and the UAW gets equity, even though the law says you should get paid first.

You could try suing the government for not following their own laws, but you can't sue the government unless they allow you, and in this case they won't.

The only way around this is a CDS, but the premiums on a CDS for Detroit debt would probably equal the value of the instrument, if anyone would sell you one at all, so it would be a wash.

I wasn't in the room when all the deals were made, so I will stop short of saying that I know what happened. The thing is that in a negotiated bankruptcy or where all the parties "workout" how all the debts [[and how the new ownership) will be restructured, just about everything is fair game.

I agree that the UAW should've been below the secured debt. But the problem is that the debt holders needed the UAW to agree to stay on board in order to keep the company running. You essentially get a Mexican Standoff and then all bets are off.

[JBMcB]

But the problem is that the debt holders needed the UAW to agree to stay on board in order to keep the company running.

No they didn't - the judge had the power to nullify the union contracts. The only leverage the unions had in the negotiations, by law, was the secured GM debt they held in their pension funds.

And yet, somehow, they got to keep their [[modified) contracts, and got a chunk of equity in the new GM. The secured debt holders got pennies on the dollar.

The same thing happened to Delphi pensioners, by the way. UAW members were given deference though they had no standing for it [[again, contracts don't have a lot of bearing here, it's up to the judge to make sure that assets are distributed equitably - that didn't happen.)

[corktownyuppie]

No they didn't - the judge had the power to nullify the union contracts.

Well, yes, in a legal perspective, I agree. But from a practical perspective, even if the judge nullifies the union contracts, what happens? GM takes 6-9 months training their replacements?

[Coaccession]

...in a negotiated bankruptcy or where all the parties "workout" how all the debts [[and how the new ownership) will be restructured, just about everything is fair game.

True enough, CY, if everyone agrees. If memory serves, GM as well as Chrysler had significant holdouts that should have made the judge stick to the rules. That the judge didn't was another step away from the rule of law to the rule of men.


The City Charter gives the Mayor and City Council the power to sell personal property, so unless the Operating Agreement for the DIA overrode the City Charter, financial distress was always a choice for the City, rather than a condition. Choosing financial distress just added $350 million to Detroit's debt, per these news reports, and dithering until an EFM's appointed will add another $400 million according to other new reports. There are those who say a Chapter 9 bankruptcy doesn't give the judge the power to liquidate assets, but hey!... who says bankruptcy law constrains what a judge can do? If a judge does liquidate non-essential Detroit assets, that will put Monet's Gladioli [[City of Detroit Purchase) and Church's Cotopaxi [[Founders Society Purchase, Robert H. Tannahill Foundation Fund, Gibbs-Williams Fund, Dexter M. Ferry Jr. Fund, Merrill Fund, Beatrice W. Rogers Fund, and Richard A. Manoogian Fund -- turned over to Detroit if the rules apply) in play. Given the downgrade's consequences, you may just have your chances to bid, Red Devil, Gistok.

[Novine]

Coaccession, you have a distorted view of Detroit's debts and the threat that those pose to Detroit's assets. A large part of Detroit's debts are owed by the water and sewer department. Those debts are an obligation of the users of the system and those users across SE Michigan are responsible for paying those debts. The next largest chunk of debt are general obligation bonds. Under Michigan law, property taxes are levied to whatever level is required to pay off those debts. Those debts will get paid no matter what. Much of the remaining "debt" is nothing more than future obligations that the city has no requirement to pay today and depending on the performance of the stock market, changes in health care and pension plans, etc. may not have to pay in the future or not the amounts that are currently projected. Even if the city eventually has to pay those obligations, it doesn't have to pay them today and a judge isn't going to force the sale of assets to pay for obligations that aren't due for 20 years.

Unlike many private companies that have fallen into bankruptcy, Detroit has the ability to generate revenue through property and income taxes and state revenue sharing dollars from the state and funding from the federal government. While the elected officials may not have the wherewithal to cut the city's expenditures to match revenues, an Emergency Financial Manager would have a mandate to do so which would quickly eliminate the operating deficit that the city has today. You love to peddle doomsday financial scenarios but they have no connection to the reality even with Detroit's very strained financial situation.

[Coaccession]

...a judge isn't going to force the sale of assets to pay for obligations that aren't due for 20 years.

Bankruptcy accelerates debts to get everything settled at one time, Novine. Creditors have to take what they can get then -- cash and securities -- because there's no going back to the well later. If liquidated assets cover everything, then the debtor was illiquid but not insolvent, and the creditors can walk away with cash. That's the standard deal in such a bankruptcy, and that may be Detroit's situation... choosing financial distress rather than mobilizing assets that more than cover its liabilities. The way, though, that penalties from financial distress keep adding more liabilities -- $350 million here, $400 million there -- Detroit may face true insolvency soon [[it would take a LOT of penalties with all Detroit owns over at the DIA, but then, bond indenture writers have known about Detroit's financial problems for a LONG time).

... [Your] doomsday financial scenarios ... have no connection to the reality even with Detroit's very strained financial situation.

No one really knows how a Detroit EFM or bankruptcy will play out... this really is uncharted territory, whether precedents and statutes apply [[rule of law) or not [[rule of men). Even if precedents and statutes do apply, a Detroit bankruptcy or EFM court review would be a court of first instance for many decisions. That court will explore just how the statutes apply in context with prior law -- perhaps strictly, perhaps not -- and perforce set lots of new precedents along the way -- perhaps in line with current law, perhaps out of line. When it's done, then come the appeals. Red Devil and Gistok may not end up competing with Zacha341, Lowell, and the Sheik of Araby for everything the Detroit Arts Department has, but don't be so sure. I think Det_ard has a point about just how effectively this process has protected the City's jewels so far. They're at risk.

Raising property taxes may not save them. With Detroit's property values so low that people can and do maintain control over many properties simply by paying the minimum bid every time it comes up for tax auction, rather than paying the assessments along the way, Michigan municipal bond law doesn't really matter. The property taxes and other revenues the City can actually raise can't keep up with essential services plus the interest on the bonds, much less generate additional funds to retire the principal as promised. Raising property tax and income tax rates, especially with any additional funds going to interest and principal and pensions rather than current municipal services, can drive more and more people out of Detroit in a vicious cycle [[will the last Detroiter please pay off the city's bonds and turn out the lights before leaving town?). That's where Detroit's assets can come into play to satisfy creditors, leaving taxes to pay for services. What assets does the city need for essential municipal functions -- e.g., police cars, fire trucks, and ambulances -- and what non-essentials can it sell off without harming public safety and health? What assets generate cash to pay related bonds -- e.g., sewer and water plants -- and what assets don't generate cash?

Some folks here want to portray me as a bad guy here. I just wanted to point out -- in time! -- that ways exist so that Detroit's artworks can generate cash while Detroit still retains some form of ownership. If Detroit wants cash along with cultural rights to its artworks, keeping them on permanent exhibition or bringing them back to the DIA at times of the DIA's choosing for temporary exhibitions, research, conservation, etc., I'd be happy to help, but that's not the only alternative that could generate cash from artworks the city still owns in some way [[the smartest alternative, but not the only alternative). I'd hoped Detroit would choose some alternative -- not necessarily mine -- to just plowing straight ahead into a series of defaults and turning control of its assets over to a judge or EFM who'd likely liquidate Detroit's artworks as non-essential, non-cash-generating assets. It looks to me now like Detroit may not avoid more defaults and more associated penalties... it's already on the hook, or so the papers say, for that $350 million penalty for letting its bond ratings slide, and that first $50 million annual payment will hurt... a lot!

Maybe you're right, Novine, that Detroit can avoid a financial doomsday. I wish Detroit luck threading that needle. It just seems awfully late in the day for Detroit to keep bickering with Outstate over who runs the City's finances. If Detroit wants to keep running its own finances, it can mobilize its own assets. It's got assets -- the downgrade's a mistake with all the assets Detroit has -- but it looks to me like it's time to either use 'em or lose 'em to its creditors via EFM or bankruptcy. We'll see pretty soon, one way or another. I think my own scenario is more connected with reality than yours -- it takes into account the City's ability to collect taxes, not just the rates it levies on taxpayers -- but it's quite possible, even likely, something will happen that neither of us anticipate.

And that, Richard, is indeed the art thing again. If anybody's aware of other assets the city owns with financial value on a scale that can turn around the vicious cycle of its financial problems, now would be a good time to introduce them to the discussion. That could just lead us to that eventuality that neither Novine nor I anticipate.

[Novine]

Again, you must not understand the nature of the obligations. The obligations that Detroit has over a 20-year time period are for current employee pensions and health care. They exist on paper but the city has no obligation to pay them today nor would a judge force the city to pay them today. As for the city's ability to pay its current debts through property taxes and income taxes, those get paid first before anything else. Even at Detroit's current depressed property values, it's made those debt payments and will continue to make those debt payments. The rest of your argument is based on scaremongering and baseless speculation.

[Richard]

I think the downgrade is a precursor to the next investment tool right now funds are directed to oil , Venezuela crude is paying 14% as long as gas stays at its current price it stays filled, but the price will drop and those funds will need to be reinvested.

So it would be convenient to downgrade to set the stage to buy as cheap as possible,the next move was going to be to buy in massive bulk properties from Fannie and Freddie and convert into rentals until the market comes back,but that will not happen because the price per house in that massive purchase would not be in the best interests to the sellers and taxpayers,so the idea would be to take those same billions do it with an entire city which would give a far better return,name one major city in the US that is ripe for this? or even one that is left that could even provide this opportunity.

Almost as wild as putting something up for collateral that one would not jump at the chance to collect on in a nano second should the opportunity occur or even stack the deck to make sure it occurs.

[Coaccession]

Again, you must not understand the nature of the obligations...

Again, Novine, you must not understand the nature of bankruptcy. Claims not entered are claims not paid. Unions and employees will enter claims for what they've already negotiated and vested. The city will respond, and the judge will decide what cash and securities will settle those claims. Pension and healthcare benefits after a bankruptcy are a clean slate, like every other part of the City's finances.

... As for the city's ability to pay its current debts through property taxes and income taxes, those get paid first before anything else. Even at Detroit's current depressed property values, it's made those debt payments and will continue to make those debt payments.

Apparently all the bond ratings analysts who just downgraded Detroit's bonds again have missed the finer points of your analysis...

The rest of your argument is based on scaremongering and baseless speculation.

... as have all the other analysts who say Detroit's going to run out of cash to pay its bills in a matter of weeks. According to your analysis, Novine, everything in the news is scaremongering and baseless speculation. You might be right, but I'd be honestly surprised if you were.

[Coaccession]

... the idea would be to take those same billions [to] do it with an entire city which would give a far better return[...] name one major city in the US that is ripe for this? or even one that is left that could even provide this opportunity.

I'd almost thought you were talking about Detroit's real estate as an asset...

Almost as wild as putting something up for collateral that one would not jump at the chance to collect on in a nano second should the opportunity occur or even stack the deck to make sure it occurs.

... then I read your last paragraph. Why pay rent or property taxes when you can squat for free? Detroit's got to turn that around, and to pay for the municipal services that can do that -- like reliable public health and safety for starters -- it's got to turn around its finances. Its real estate can't do that when only the naive pay rents and property taxes, while the savvy simply squat... that is, if they can get to a property before the strippers. There's too much Detroit real estate that no one would take for collateral, and not enough anyone would. So, back to the art thing again, Richard?

[Novine]

"According to your analysis, Novine, everything in the news is scaremongering and baseless speculation. You might be right, but I'd be honestly surprised if you were."

I never said anything such thing but keep up the distortions. It's what you're best at doing. I understand the distinctions between what debts are going to be a concern if Detroit goes into bankruptcy and which are not. You act is they are all of the same nature when they are not. As far as Moody's and others, the downgrades are no different than what happened with the US debt last year. The downgrade is a direct result of all of the uncertainty over whether Detroit will get an EFM or not. It's uncertainty over the process that is causing most of the concerns, not whether the debts that are currently owed will be paid as the city continues to make payments on its current debt obligations.

[Richard]

I'd almost thought you were talking about Detroit's real estate as an asset...



... then I read your last paragraph. Why pay rent or property taxes when you can squat for free? Detroit's got to turn that around, and to pay for the municipal services that can do that -- like reliable public health and safety for starters -- it's got to turn around its finances. Its real estate can't do that when only the naive pay rents and property taxes, while the savvy simply squat... that is, if they can get to a property before the strippers. There's too much Detroit real estate that no one would take for collateral, and not enough anyone would. So, back to the art thing again, Richard?

Its not about the art thing and it never really was,its about the bond status and how this country has certain groups that profit from chaos,but you might try that with Greece I am sure they could use the help.

Where you are not seeing the forest because of the trees is when you look at the bigger picture,yes real estate counts ,always has and always will,indictments are being handed down by the box load, Why ? nobody cares about Detroit right?

You are underestimating the message and the power of the new charter ,if seeing council members starting to sweat knowing their days are numbered are not the first clue then I do not know what is,nothing to do with EFM, to a citizen run city,those people did not work so hard on it because they were bored.

Property taxes ,they already know how to deal with that either they start or they will be replaced with someone who will that's already clear.

You do not sell your soul and deprive future generations of their right to enjoy what the past has given you to enjoy for short term gain that's just so un American and disrespectful.

Detroit has a lot more potential then they want you to believe.

Glass half full or half empty?

[JBMcB]

As far as Moody's and others, the downgrades are no different than what happened with the US debt last year.

It's quite a bit different. US debt was downgraded from completely safe to nearly completely safe. Still high-investment grade, as evidenced by it's low yield.

Detroit debt went from low investment grade to junk, triggering swap agreements that it must now cover. This also means that some groups are barred from holding Detroit debt - like some pension funds and municipal investment organizations. It's a big deal.

<quote>It's uncertainty over the process that is causing most of the concerns, not whether the debts that are currently owed will be paid as the city continues to make payments on its current debt obligations. [/QUOTE]

The rating is based SOLELY on the future ability of a debtor to pay. That's what a rating is. The downgrade is an indication that the ratings agencies think that Detroit will be less likely to pay out it's obligations.

[mwilbert]

The rating is based SOLELY on the future ability of a debtor to pay. That's what a rating is. The downgrade is an indication that the ratings agencies think that Detroit will be less likely to pay out it's obligations.

You seem to think these two sentences amount to the same thing, but they do not. The main reason the US debt got downgraded last year [[insofar as there was a real reason) was that the willingness of the US government to pay its debts was called into question by various members of Congress seeming to contemplate default. There was no change in the US government's ability to pay its debts. Uncertainty and ability are two different things, but they can both result in debt downgrades.

I think Detroit's best option would be bankruptcy and default, but as has been previously discussed I don't think that will be allowed to happen. And it would still be a bad thing.

[Coaccession]

...

keep

up the distortions. It's what you're best at doing. I understand the distinctions between what debts are going to be a concern if Detroit goes into bankruptcy and which are not. You act is they are all of the same nature when they are not.

Novine, there's a whole hierarchy of claims in bankruptcy... only a few specifics come to mind because I don't specialize in this: federal taxes; payroll; debtor in possession financing; collateralized bonds; secured, unsubordinated; secured, subordinated; unsecured notes; unsecured trade finance, etc., etc., etc. To the extent either of us distort, it's because we don't specialize in this. I seem to have a lot more general knowledge about bankruptcy than you do, but I don't accuse you of distortion because I can see you're doing the best you can with the knowledge you have. I do try to correct you, though, when my general knowledge tells me you're wrong. Despite the extensive hierarchy of claims in bankruptcy, claims that creditors don't present to the court are claims that the court doesn't consider. In that sense all claims are the same. In other senses they aren't. That's not a distortion. Neither is noting that Detroit has severe financial problems that you're not facing up to despite the topic of this thread -- news on its latest bond downgrade.

As far as Moody's and others, the downgrades are no different than what happened with the US debt last year. The downgrade is a direct result of all of the uncertainty over whether Detroit will get an EFM or not. It's uncertainty over the process that is causing most of the concerns, not whether the debts that are currently owed will be paid as the city continues to make payments on its current debt obligations.

JBMcB is almost right in his reply to you on this. It's not just ability to pay, it's willingness to pay too. The US Congress has an infinite ability to print dollars, but debt limits express its limited willingness to do so. When Congress caviled about raising the latest debt limit, it reminded bond raters about those limits to its willingness. In Detroit's case, the revenues are weak, and JBMcB is right that that's what worries the bond raters. If revenues were't a problem relative to expenses, there would be no EFM process or bankruptcy risk for the bond raters to worry about. If Michigan bond law guaranteed full payments on all Michigan municipal bonds, they'd all have top ratings. They don't, and revenue shortages, not scaremongering and baseless speculation, is why the news is full of stories about Detroit's financial distress.

We do agree that Detroit can pay if it's willing. You think Detroit can -- indeed, must by law -- raise enough revenues with higher property tax rates to cover its bonded debt payments. I fear that math puts it into a civic death spiral, driving out population at an increasing rate. You consider that scaremongering and baseless speculation, but... hey, let's look at the Census data. Lost population is real enough. I think Detroit can raise enough cash with its art collection to pay interest and principal on its debt, and do that without selling the collection outright and paying off the debt -- which I expect a judge will force it to do if it comes to bankruptcy. Richard fears that raising cash with the art collection puts Detroit in a moral death spiral, driving out sanctity at an increasing rate*. I consider that scaremongering and baseless speculation, but... hey, he'll point me to data that substantiate his point... won't he?

The world's a complex adaptive system, and much we consider causation we should more properly attribute to emergence. Still, we make choices and act on our best interpretation of the system. I apologize for being less charitable toward other's interpretations than perhaps I ought to be when I consider we're all likely to be surprised. At the same time, I tip my hat here to Michael Moynihan, who reminded us that while we're all entitled to our own opinions, we're not entitled to our own facts.

*You do not sell your soul and deprive future generations of their right to enjoy what the past has given you to enjoy for short term gain that's just so un American and disrespectful.