Detroit Banko Fallout Hit Muni Bond Market.....

[douglasm]

Some of the talk around Detroit's bankruptcy filing was how it might effect the municipal bond market. Although also citing other factors, an article in the Detroit News at least implies that the filing is tending to push rates up for other muni bond sales.

http://www.detroitnews.com/article/2...text|FRONTPAGE

I know one of the filings was for a pension fund, but the Genesee County sewer project should have been backed by revenue. I get the impression that it's going to be hard to do a major iinfrastructure project [[or at least get financing for one) for a while......

[renf]

http://dealbook.nytimes.com/2013/08/...=business&_r=0
The New York Times has a front page above the fold story about the consequences of Detroit's woes for all governmental agencies in the state that borrow to continue their operations. The lead story in the finance section of today's Wall Street Journal is on the same topic. There are hints that leaders
of the bond market could more or less discourage their clients from buying any Michigan instruments.

Black Rock - the bond marketing firm - has suggested that the ideal solution is for the state to pay the unsecured bond obligations of Detroit and, presumably, the other municipalities and school districts that face debts they cannot pay with their current tax revenues. What would be the cost of doing so? Our style of life in Michigan depends upon the ability of governmental agencies borrowing money on a regular basis. In the long run, would all state residents benefit from paying higher taxes now to pay off the unsecured bonds of Detroit and other cities and municipalities? If the bankruptcy court allows Detroit to not pay bondholders, will all Michigan residents suffer the fare of paying much higher taxes in the short and long run?

[coracle]

"Black Rock - the bond marketing firm - has suggested that the ideal solution is for the state to pay the unsecured bond obligations of Detroit and, presumably, the other municipalities and school districts that face debts they cannot pay with their current tax revenues".

Absolutely, definitely NO!!!. This would open Pandora's Box for the "obligations of Detroit and, presumably, the other municipalities and school districts that face debts they cannot pay with their current tax revenues". They should learn to live within their means like we all have to, or find a way of earning more without expecting handouts from those that do.

[iheartthed]

"Black Rock - the bond marketing firm - has suggested that the ideal solution is for the state to pay the unsecured bond obligations of Detroit and, presumably, the other municipalities and school districts that face debts they cannot pay with their current tax revenues".

Absolutely, definitely NO!!!. This would open Pandora's Box for the "obligations of Detroit and, presumably, the other municipalities and school districts that face debts they cannot pay with their current tax revenues". They should learn to live within their means like we all have to, or find a way of earning more without expecting handouts from those that do.

It was the state's decision for Detroit to file bankruptcy. I think it's fair to ask why shouldn't the state be on the hook for Detroit's financial obligations if the state is the one who decides that the city should file bankruptcy?

[Hermod]

It was the state's decision for Detroit to file bankruptcy. I think it's fair to ask why shouldn't the state be on the hook for Detroit's financial obligations if the state is the one who decides that the city should file bankruptcy?

Now that is the least logical statement I have ever seen on DetroitYes.

At some point in time, the city will be forced into bankruptcy. They have -pretty much hocked everything of value except the DIA and Belle Isle. At some point, no one will buy Detroit GO bonds to cover the annual deficits.

If you face bankruptcy, it is better to go into it on your own terms than on the creditors terms.

[iheartthed]

Now that is the least logical statement I have ever seen on DetroitYes.

At some point in time, the city will be forced into bankruptcy. They have -pretty much hocked everything of value except the DIA and Belle Isle. At some point, no one will buy Detroit GO bonds to cover the annual deficits.

If you face bankruptcy, it is better to go into it on your own terms than on the creditors terms.

It's not a matter of opinion, it is fact. The state of Michigan made the decision that Detroit file bankruptcy. Detroit doesn't have the legal authority to do so without the state's approval. In this instance, Detroit itself did not even seek permission by its own authority to file bankruptcy. Instead, the state intervened and decided that Detroit was insolvent. If the state does not want to be held liable for Detroit's financial obligations then it should allow the city full authority over its own finances.

[Wesley Mouch]

It was the state's decision for Detroit to file bankruptcy. I think it's fair to ask why shouldn't the state be on the hook for Detroit's financial obligations if the state is the one who decides that the city should file bankruptcy?

ummm, maybe because its the city's problem.

That is the least logical argument ever made. Its like asking the cop to pay for the traffic ticket he just wrote you because he 'caused' the ticket.

Until Detroit takes responsibility for its part in this mess -- even though others are to blame as well -- nobody's going to pitch in.

Oh, and did you hear the one about the $1,000,000 check lost by Detroit's accounting department [[Deadline Detroit). Sure, I'll help you pay your bills, but first deposit that check!

[iheartthed]

ummm, maybe because its the city's problem.

That is the least logical argument ever made. Its like asking the cop to pay for the traffic ticket he just wrote you because he 'caused' the ticket.

Until Detroit takes responsibility for its part in this mess -- even though others are to blame as well -- nobody's going to pitch in.

Oh, and did you hear the one about the $1,000,000 check lost by Detroit's accounting department [[Deadline Detroit). Sure, I'll help you pay your bills, but first deposit that check!

This isn't about retribution. This is about how an investor, who probably gives less than two shits about your local turf wars, views the risk of investing in municipalities in Michigan.

[Eber Brock Ward]

I am shocked -- SHOCKED! -- that Black Rock would advocate stabilizing the market, even if that meant they might get more action and might look like a conflict of interest.

[BankruptcyGuy]

My take:

1. When investors purchased these bonds, they did so at a discount. That discounted reflected the current risk that the actual payor would default.

2. These bonds traded at a discount to the state's bonds. This yield spread indicated that the investors thought that a state guarantee was not a part of the bonds. In fact, most muni bonds trade at a discount to state-issued bonds.

3. If those are true, why would the city in bankruptcy give a windfall to those investors, especially since those funds would be better spent on pension obligations or, god forbid, city services.

4. The market is now adjusting, country-wide, to the fact that some muni bonds actually have risk, and you actually have to underwrite that risk, which means you have to review the municipality's financials, which means that those financial statements, and their quality or lack thereof, matter. That, I think, is a good thing.

5. Does #4 sound familiar? Take out "state" and replace with "US Government" and take out "muni bonds" and replace with "home mortgages" and you have the same story. I think most people agree that bailing out home mortgage bond investors is a poor use of government money. I think most people will also agree that using state dollars to bail out muni bond investors is a bad idea as well.

[douglasm]

BankruptcyGuy......

I can understand the bond markets being skidish about Saginaw County's bond proposal because it was to be used to shore up their pension obligations, but why Genesee County's sewer/water bonds. Shouldn't those be backed by sewer and water revenues, or are the bond markets just in a bad mood overall right now?

We almost had a similar situation in the area I live in, when a $50m arena project came this close to bankrupting a local municipality because it couldn't meet it's bond obligations. Thankfully, our sewer project was using mostly ARRA funds, but some local jurisdictions reported worried bond investors over the threat of a municipal banko.

[Novine]

"4. The market is now adjusting, country-wide, to the fact that some muni bonds actually have risk, and you actually have to underwrite that risk, which means you have to review the municipality's financials, which means that those financial statements, and their quality or lack thereof, matter. That, I think, is a good thing."

If this is the case, wouldn't we see this happening nationwide? Are we? My take is that Orr's effort to break the guarantee for general obligation tax bonds to be paid by a dedicated tax revenue or dedicated revenue stream is leading to a backlash against any bonds in Michigan. Orr's position on both kinds of bonds is contrary to state law. It will be interesting to see if the federal bankruptcy judge puts a stop to Orr's misguided and damaging efforts. To date, Orr's actions have done more harm to Detroit and other municipalities in the state than they helped.

[Novine]

When I pointed out how Detroit's bankruptcy would impact bond issues throughout Michigan, some of the same posters in this thread dismissed that possibility.

[renf]

What would be wrong or inappropriate if Governor Snyder and the state
legislature raised Michigan taxes to pay for the debt for the general
obligation bonds of Detroit and other currently insolvent municipalities
and school districts? We the tax payers of Michigan might end up much
better off in the long run by paying lower interest rates on the bonds that
support governmental and educational activities in this state.

[Wesley Mouch]

What would be wrong or inappropriate if Governor Snyder and the state
legislature raised Michigan taxes to pay for the debt for the general
obligation bonds of Detroit and other currently insolvent municipalities
and school districts? We the tax payers of Michigan might end up much
better off in the long run by paying lower interest rates on the bonds that
support governmental and educational activities in this state.

If Detroit had tried hard to reform before bankruptcy, then there would be nothing wrong.

Otherwise what wrong is that Detroit's behavior will never change if money is poured over problems.

We need a functional city, not a ward of the 'state'.

[coracle]

If Detroit had tried hard to reform before bankruptcy, then there would be nothing wrong.

Otherwise what wrong is that Detroit's behavior will never change if money is poured over problems.

We need a functional city, not a ward of the 'state'.

Better [[logical) explanation than my tirade. I agree.

[coracle]

Not only would it be wrong and inappropriate renf; it would be outrageous. What entitles Detroit to handouts from the State to pay its living expenses for the last several years? Once started it would be ever increasing and never ending. I would much rather pay a higher premium to bond holders who I can fire, than be forced to subsidize an entity with a proven failed record that I had no control over. Raise your own taxes.

[Packman41]

Speaking of bondholders, I received the attached pdf file from an institutional muni bond advisor. The document describes, quite clearly, just how different Detroit is from the rest of the country.

The author was trying to determine, “What’s more important for municipal investors: how different is Detroit from other city municipal issuers they own, particularly as it relates to general obligation bonds secured by the promise of levying taxes? Is Detroit a paradigm or an outlier? There are two factors to consider: a city’s economic strength, and its finances.

The author finds the answer:
“What makes Detroit different is its elevated funded and unfunded obligations, the decline in tax receipts, and the poor state of its economy and infrastructure. Unfortunately for bondholders, tax increases are not an answer: corporate and personal tax rates in Detroit are already the highest in the state, making restructuring inevitable. As city GO issuers go, if I had to choose, I would describe Detroit as more of an outlier than a paradigm. The table below shows all of American’s economically challenged big cities: MSAs with at least 500,000 people whose average economic percentile is 25% or worse, using our five measures. Even within this troubled group, Detroit stands out as having the worst overall economic and fiscal mix.”

Everyone should take the time to read and understand this report.

[313WX]

For the folks suggesting that the state of Michigan shouldn't take on Detroit's debt, you better talk some sense into "Y'alls Boy" Schuette with his insane stance on the pensions and Detroit's bankruptcy.