DETROIT BLOCKS OTHER CITIES FROM BOND MARKET
c.2013 New York Times News Service
The Detroit Effect has rippled all the way To Wall Street.
Two weeks after Detroit declared bankruptcy, cities, counties and other local governments in Michigan are getting a cold shoulder in the municipal bond market.
The judgment has been swift and brutal. Borrowing costs are up around the state, in some cases drastically. On Thursday, Saginaw County became the latest casualty when it said it was delaying a $60 million bond sale planned for Friday. It had hoped to put the proceeds into its pension fund.
It was the third postponed bond sale in Michigan since Detroit dropped its bombshell July 18.
Detroit’s bankruptcy, the largest ever by a municipality, has raised fundamental concerns about the safety and security of municipal bonds, certainly in Michigan but potentially elsewhere in the country, too. The municipal bond market appears to be sending Michigan’s cities a message that, no matter how well rated they are, they are going to have to put their plans and projects on hold or pay more for them.
Detroit’s state-appointed emergency manager, Kevyn Orr, has proposed imposing deep cuts on some bondholders — treating them the same, in effect, as retired Detroit workers who have been receiving city-paid health insurance that will now end. Orr’s bankruptcy plan would put them all at the back of the line for whatever money is available, as unsecured creditors.
Putting a city’s “full faith, credit and taxing power” behind a bond no longer means what it did in the past, anywhere in the state, critics say. The governor and Orr have said they are not concerned about the effect of the bankruptcy plan on the municipal bond market as a whole. But other participants find their treatment of indebtedness profoundly disturbing, and their anxiety has spilled over to other Michigan municipalities.
“A lot of the people I talk to are investors who are just very angry about this,” said Matt Fabian, a managing director at Municipal Market Advisors. “Bonds are so cheap everywhere across the whole market, there’s no reason to put anyone in Michigan bonds right now.”