Detroit recovery plan raises specter of default: Moody's

Thu May 16, 2013 11:57am EDT

(Reuters) - Detroit's bondholders face a heightened chance of default or bankruptcy by the city under a financial recovery plan released on Monday by a state-appointed emergency manager running the city, Moody's Investors Service said on Thursday.

"The plan is negative for Detroit bondholders because it indicates that the city requires 'significant and fundamental debt relief' to help shore up its finances, a clear indication that a default or bankruptcy is a real option," the credit rating agency said in a report.

Specifically, the plan Kevyn Orr sent Michigan Treasury officials outlines four ways to restructure Detroit's debt: by pushing principal payments into future years, permanently reducing the amount of principal, lowering interest rates, and issuing new debt to provide cash recoveries to creditors.

Moody's said Orr's plan cites a "fair and equitable" standard for restructuring the city's finances.

"While not specifically defined in the recovery plan, this language has been used in relation to other bankruptcy proceedings to manage creditors' expectations on recovering their assets in bankruptcy, setting the stage for reductions to all stakeholders, including bondholders," the Moody's report said.

It added that the risk of bankruptcy or default has been incorporated in Detroit's general obligation rating of Caa1 with a negative outlook.