Special Report: Detroit's Bankruptcy

July 26, 2013


Last week, Detroit became the largest U.S. city to file for bankruptcy and has assumed its place in U.S. history as the largest-ever municipal bankruptcy. The city's Chapter 9 filing on July 18 came as no surprise to the market, as Detroit's growing pile of more than $18 billion in debt continues to cripple the city. Although the once booming hub of American manufacturing had tried to make negotiations with creditors, the city's dire financial state made its bankruptcy filing ultimately inevitable.

Governor Rick Snyder defended his actions, commenting "The fiscal realities confronting Detroit have been ignored for too long. I m making this tough decision so the people of Detroit will have the basic services they deserve and so we can start to put Detroit on a solid financial footing that will allow it to grow and prosper in the future. This is a difficult step, but the only viable option to address a problem that has been six decades in the making."

The Damage: Detroit By The Numbers

According to Bloomberg Briefs' Editor Aleksandrs Rozens, here are the key figures that are currently plaguing the bankrupt city:

$18 billion - Detroit s estimated debt obligations.

$11.9 billion - City s unsecured obligations to lenders and retirees.

$6.4 billion - City s obligations backed by enterprise revenues (Revenue Bonds).

38 cents Of every tax dollar that the city collects goes to service legacy debt and other obligations rather than providing services for the city s residents and businesses.

$115.5 million - Detroit s negative cash flows in fiscal year 2012.

8% - Interest accrued on Detroit s deferred payment of pension fund contributions.

Over 100,000 - Estimated number of Detroit creditors.

22% - Reduction in city employees since fiscal year 2010.

1.85 million - Detroit s population in 1952, its highest point.

62% - Decline in Detroit s population from 1950 to 2012.

150,000 - Number of manufacturing jobs Detroit lost between 1947 and 1963 as smaller auto makers disappeared and the Big Three auto makers move operations to suburbs and out of state.

47% - Detroit s share of U.S. auto sales in 2008.

80% Of Detroit s manufacturing was lost between 1972 and 2007.

78% Of Detroit s retail establishments were lost between 1972 and 2007.

735,104 - Number of jobs in Detroit for residents and non residents in 1970.

346,545 - Number of jobs in Detroit for residents and non residents in 2012.

9.4% - Jobless rate in Detroit as of June 2013.

30% - Decline in Detroit s municipal income tax receipts since 2002.

36% Of Detroit s population lives below the poverty level.

54% Of Detroiters own a home.

16% Of Michigan s population lives below poverty level.

28% - Decline in Detroit s receipts from utility user s tax over the last decade.

$1.6 billion - Decline in city s assessed property values over the last five years.

$134.9 million - Property tax revenues for city s 2013 fiscal year.

78,000 - Number of abandoned structures in Detroit, representing 20% of the city s housing stock.

What's Next?

Though Detroit's bankruptcy will certainly go down in the history books, many analysts believe its effect on the municipal bond market will be very minimal. First, investors need to understand that the court first must affirm the city's insolvency in order for Detroit to receive the Chapter 9 protection - a process that will likely be very lengthy as creditors will try to prove Detroit has adequate cash flow and assets (that could be liquidated) to pay back its debts.

In regard to impacts on the municipal bond market, investors must also consider that the market has been expecting this bankruptcy for a long time, meaning Detroit's municipal bond prices already reflect this event.

Some investors, however, are understandably concerned that Detroit's general-obligation bondholders will continue to be treated as unsecured creditors. This issue applies to about $530 million in general-obligation bonds, some of which are unlimited tax revenue bonds. Without special treatment, unsecured creditors will receive only pennies on the dollar for repayment. But according to most experts, investors who bought these particular bonds should have known that the possibility of Detroit's bankruptcy was inevitable.

In response to the special treatment, Detroit's emergency manager Kevyn Orr stated "My job, the contract I signed, the covenant I have with the state and the governor doesn't say put the city on sustainable footing while taking into consideration the impact this might have on the broader general-obligation market. No, it's just: Put the city on sustainable footing."

Whether or not Orr will be able to fulfill his obligation, however, is still questionable given the city's dire financial position.

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