Setting Precedent: Will some Detroit debt be considered ‘unsecured?’

February 19th, 2014

Does Detroit’s bankruptcy filing mean the city can consider some of its bondholders “unsecured creditors” for the purposes of lowering payments on debt as Chapter 9 restructuring and adjustment plans move forward?

That question, and others, will be argued today before bankruptcy Judge Steven Rhodes in a scheduled 10 a.m. hearing. Detroit Emergency Manager Kevyn Orr wants to classify as “unsecured” the general obligation bondholders. That would include those backing the debts for infrastructure projects that were paid with voter-approved taxes.

Like everything in Detroit’s bankruptcy filing, the legal questions have far-reaching implications for the municipal bond market and other financially challenged municipalities.

“We’re more or less in uncharted territory,” says John Mousseau, executive vice president and director of fixed income and a municipal bond portfolio manager at Cumberland Advisors in Sarasota, Fla. He spoke at an American Enterprise Institute event this week that looked at the Detroit bankruptcy’s impact on a range of issues including pensions, bond markets and private-public partnerships.

 

-By WDET’s Sandra Svoboda

 

@WDETSandra and nextchapter@wdet.org