Detroit Takeover Won't Harm Muni Insurers: Analyst

Tickers in this article: AGO MBI
(Updated with corrected information about MBIA exposure to Detroit. It is $2.5 billion, not $3.4 billion as previously stated.)

NEW YORK (TheStreet) -- Michigan's planned appointment of an emergency financial planner to take over the city's finances "should not be viewed as a negative" to financial guaranty insurers MBIA(MBI) and Assured Guaranty(AGO) , according to MKM Partners analyst Harry Fong.

The controversial move to take over Detroit by Michigan Governor Rick Snyder, a Republican, is widely seen as assured, despite opposition from the city council and community groups. Detroit has more than $14 billion in liabilities, according to The New York Times, and tax revenues shrank dramatically from the loss of auto manufacturing jobs and the subprime mortgage crisis.

Assured Guaranty has about $2.8 billion in exposure to Detroit debt, including $355 million in general obligation debt, $1.85 billion of insurable exposure to water and sewer revenue bonds and $600 million in exposure to the Detroit school district, according to a report Fong published Monday. MBIA has $2.5 billion in exposure, including $100 million in general obligation debt. The bulk of this debt is backed by water and sewer revenue, according to Fong.

"Water and sewer revenue bonds would almost certainly be unaffected in the event of a bankruptcy, as the city cannot divert revenues from the utilities for general purposes," Fong writes. He further argues that the new financial manager "will have the power to sell municipal assets, restructure services, restructure labor contracts and reorder the city's finances."

Fong adds that "an independent emergency manager should enable the city to avoid the conflict so evident in the City of Harrisburg, where the mayor and City Council have spent the better part of the last few years fighting over ways to solve the Pennsylvania capital's fiscal problems."

-- Written by Dan Freed in New York.