As Kevyn Orr tries to restructure Detroit's debt float, Wall Street fights back. / Ryan Garza/Detroit Free Press
Several Wall Street commentators have called this week for a vigorous pushback against Detroit emergency manager Kevyn Orr’s plan to pay the city’s bondholders just pennies on the dollar in a massive debt restructuring.
The commentaries offer a window into how Wall Street is reacting to the plan for restructuring Detroit’s debt floated by Orr a few weeks ago. If the spirit of these commentaries is widely shared, then avoiding a Chapter 9 municipal bankruptcy filing by reaching agreements with creditors might be more difficult than some had hoped.
The Bond Buyer published a commentary Monday written by Adam Stern, an attorney and the director of municipal research at Breckinridge Capital Advisors, in which Stern wrote that “it is past time for the bond market to forcefully react” to Orr’s plan to pay debt holders a tiny fraction of what Detroit owes them.
“Detroit’s proposal to write-down its full faith and credit GOs (general obligation bonds) in the 90% range is a bridge-too-far,” Stern wrote. “Maybe Detroit has given its best effort and can only afford 10 cents on the dollar. But probably not. Show us some asset sales. Prove to the market that the tax base is exhausted. ... That is the City’s burden and threshold to which a bankruptcy court should hold it.”
Also, the Municipal Market Advisor’s Weekly Outlook published an analysis titled “Baffled by Detroit” that called for the State of Michigan to force Orr to rework his plan to protect bondholders or face higher borrowing costs for all other municipalities in the state.
“Absent a shift in tactics, we believe that leadership from the State is needed now to contain potential spill-over damage,” the analysis said. “The State could consider options to isolate the impact of Detroit on the debt of its other municipalities.”
And on Monday, Peter J. Hayes, a managing director and head of the Municipal Bonds Group at BlackRock, the world’s largest asset manager, which oversees $114 billion in municipal assets, published an opinion piece in the Free Press that called Orr’s plan “misguided.”
“BlackRock urges the State of Michigan to take action to protect the thousands of ordinary investors — many Michigan taxpayers — with interests in GO bonds,” he wrote. “Ignoring the full faith and credit pledge that was granted to these bonds could permanently inhibit the ability of Michigan’s municipalities to obtain financing on favorable terms.”
Not all creditors have balked at Orr’s terms. Orr’s office revealed this week that he had reached a settlement with some unnamed creditors, according to federal court filings in a lawsuit against a financial insurer. Details were not immediately released.
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