Wall Street Weighs Detroit's Bankruptcy
Updated with additional information throughout .
NEW YORK ( TheStreet) - Detroit, once the nation's fourth-largest city, has filed for a Chapter 9 bankruptcy after out-of-court restructuring efforts failed on Thursday. Wall Street is now weighing the potential impact of the city's financial problems.
Some analysts said a prominent municipal bankruptcy could pressure the shares of municipal bond insurers such as Assured Guaranty
Ratings agency Moody's said the filing was negative for Detroit's creditors and said benefits of the in-court restructuring are unclear.
"If we're taking a very, very long-term view this could be the point whether the city turns around, but at this time it is a credit negative," Genevieve Nolan, a Moody's assistant vice president wrote in a note.
"It's too early to tell what benefits - if any - come from this action."
While Wall Street looks for spillover effects of the filing, Detroit's worsening financial condition is expected to cause significant hardship for the city and its blue collar workers.
Some key issues precipitating the filing and which will be sorted out in courts are the city's $9.2 billion in unfunded pension and retiree health care liabilities. Meanwhile, Detroit will need to work to gain financing to maintain services to the city's residents, as it negotiates with creditors.
"Before issues like bondholder recovery levels and what level of services city residents will experience become clear, the bankruptcy is likely to be a complicated and protracted process," Moody's said.
"What this does is give the city breathing room," Paul Maco, a partner in the public finance group at Bracewell & Giuliani said in a Thursday evening interview. Maco, who worked with the Orange County, California bankruptcy as a director of the SEC's Office of Municipal Securities, said Detroit's Chapter 9 could take as long as several years.
It remains unclear what role, if any, the state of Michigan or the federal government will play in helping the city emerge from bankruptcy.
A Michigan circuit court judge, Rosmarie E. Aquilina, temporarily barred any further action on Detroit's bankruptcy and asked for the filing to be withdrawn. The state, however, is appealing the ruling and it is to be seen how Michigan or federal law will impact the city's filing.
In bankruptcy, Detroit's pension holders are likely going to be asked for concessions that may have once seemed unthinkable. General obligation bondholders, meanwhile, may see the value of their claims fall to just cents on the dollar.
According to emergency manager Kevyn D. Orr, the city sought bankruptcy after asking creditors to trade in $11 billion in claims for $2 billion in new notes. Detroit's retirement system is the city's largest unsecured creditor with a $2.04 pension claim, while a pension for the city's police and retirement is owed $1.44 billion, the filing bankruptcy shows.