Detroit’s $3.7 trillion dollar muni-bond market is facing trouble. Detroit’s emergency manager Kevyn Orr is battling insurers, individual investors and fund companies that hold over $5 billion of Detroit water and sewer bonds as restructuring of that debt continues. Essentially Mr. Orr wants to renegotiate the terms of the municipal bonds, effectively lowering their returns through rate or period changes. If the restructure of the debt were successful, millions of dollars of city revenue would be freed effectively reducing losses for city creditors in Detroit’s $18 billion bankruptcy case, according to the WSJ.
Mr. Orr’s spokesman commented, “We are still making our debt payments and the bonds are secured.” The proposal has been discussed but nothing has yet been decided. This fight between investors and muni-debt issuers is not limited to Detroit, and other U.S. cities will face the problems of a dwindling population and tax base as well as rising costs and large pension obligations.
Financial advisers are now being careful when telling investors to have muni in their portfolio. Muni bonds have been restructuring as municipalities from California to Pennsylvania have defaulted and sought bankruptcy protection. In the next few days, Detroit’s emergency manager Kevyn Orr will hire external engineer consultants to valuate the water and sweet system, which delivers $400 and some millions in revenue each year. It has not yet been determined whether or not Detroit can even file for bankruptcy protection before all of these matters are solved. Finally Standard & Poor’s credit rating commented that it viewed “Mr. Orr’s plan for the sewer and water system as tantamount to a default on the bonds.”