DETROIT, Michigan (PNN) - June 14, 2013 - Detroit said on Friday it would stop making payments on some of its about $18.5 billion debt, which would put it in default, and the insolvent city called on most of its creditors to accept pennies on the dollar to help it avoid the largest municipal bankruptcy filing in Fascist Police States of Amerika history.
In a forceful opening salvo of negotiations with debt holders, Detroit Emergency Manager Kevyn Orr announced a moratorium on some principal and interest payments, including one payment he said was due on Friday.
Under his proposal, Orr said unsecured debt holders would be paid less than 10 cents on the dollar, but some creditors would get a bit more based on city revenue. Some $11.5 billion of the debt is unsecured and $7 billion secured, according to figures presented by Orr.
Orr said secured creditors would get better treatment, although how much better was not specified.
"We may try to get a discount from them, but the reality is they are secured," Orr said.
Secured credit means an asset is pledged to back the debt. For example, Detroit has secured its interest rate swap agreements with casino revenue.
He said the city would skip a $34 million payment due on Friday on $1.43 billion of pension certificates of participation, to allow the city to conserve cash needed to provide services to residents.
Fitch Ratings and Standard and Poor's Ratings Services immediately downgraded Detroit's rating to a level reserved for borrowers about to default.
"We expect default to be a virtual certainty," S&P said in a statement accompanying its downgrade to CC from CCC-negative.
A trustee for the bond issue will have to certify that Detroit failed to make the payment on Friday, which would trigger a formal default.
Detroit's crisis is being closely watched by FPSA debt markets. It did not immediately affect the $3.7 trillion FPSA municipal bond market, where prices ended higher on Friday.
Orr said he would meet with creditors over the next 30 days. Market participants said the outcome of those talks could lead to higher interest rates for the state of Michigan and even the broader market if Orr wins concessions from secured creditors.
"Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin," Orr said in a statement.
Orr said the city was "insolvent," unable to pay its debts and needed shared sacrifices from everyone, including debt holders, to have any hope of a revival.
Insolvency and inability to pay debts are two tests a government must meet for a judge to accept a Chapter 9 municipal bankruptcy.
"It looks and feels like a pre-packaged bankruptcy plan," said Richard Ciccarone, managing director at McDonnell Investment Management, in reaction to the proposal.
A pre-packaged bankruptcy is when an entity negotiates a deal with creditors and other interested parties in advance and presents that to a bankruptcy court judge.
Orr, a bankruptcy attorney brought in by the state of Michigan to clean up the city's finances, repeated after the meeting that he sees a 50/50 chance of a bankruptcy filing.
Detroit is the poorest large city in the United States, with more than a third of its residents living below the official government poverty line, while its population has shrunk to about 700,000 people.
The city has the highest violent crime rate of any major FPSA city, some 78,000 abandoned and blighted structures and 40% of streetlights dark, the document said. Only about a third of the city's ambulances were in service in the first quarter of 2013. Just 53% of owners paid their 2011 property taxes.
The document disclosed that Detroit could face unfunded pension liabilities, such as for retired police and fire workers, of $3.5 billion, up from the $644 million previously estimated.
An oversight board could be created for Detroit, similar to one set up after New York City's financial difficulties in 1970s that would ensure reforms are sustained, Orr said.
City workers and retirees would also face changes to their pensions and health care coverage "consistent with available funding."