Excerpt
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 on July 18. Earlier this week, the city of Battle Creek said it would postpone a $16 million deal scheduled for August because of concerns that investors would demand interest rates that were too high. And the previous week, Genesee County withdrew a $54 million bond sale from the market for the same reason.
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 postpone their plans and projects or pay more for them.
When Jefferson County, Ala., declared bankruptcy in 2011, there were warnings it had tainted the credit of all other municipalities in the state, but the expected fallout never materialized. After Orange County, Calif., came through its bankruptcy in the 1990s, its borrowing costs actually fell. But Michigan appears to have something new — a bankruptcy that makes it harder for others in the state to borrow.
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. Mr. Orr’s bankruptcy plan would put them all at the back of the line for whatever money is available, as unsecured creditors.
And because the city’s bankruptcy filing was approved by the governor, Rick Snyder, it is seen as the best distillation of how Michigan will treat certain bondholders in times of trouble.
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 Mr. 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.
No comments:
Post a Comment