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Detroit bankruptcy and muni bonds.
Old 12-03-2013, 02:52 PM   #1
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Detroit bankruptcy and muni bonds.

What does today's court go ahead for the Detroit bankruptcy mean for muni bonds?

I haven't run across any analysis yet.

Detroit Is Eligible For Bankruptcy, And City Pensions Are At Risk - Forbes

One issue that had been on the table was whether pension obligations were protected from bankruptcy and looks like today's ruling takes that off the table. From what I read months ago that would have created a new precedent for muni bonds and cause a reevaluation of muni default bond risks in general.

Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
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Old 12-03-2013, 04:13 PM   #2
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They defaulted on their GO bonds in October.

I think most of them are insured, though there are some out there that aren't.

In terms of what this means for the future, I think you're right, the pension ruling was good for munis.

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Old 12-03-2013, 05:37 PM   #3
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IMHO- The effect on muni's won't be fully known for some least until SCOTUS weighs in on some of these issues (assuming it will).
Detroit's expected bond default seen raising constitutional issue
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Old 12-04-2013, 11:30 AM   #4
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It's pretty clear that some version of bankruptcy is now a credible option for municipalities. Appeals will fly wildly for the next few years but everyone involved will be losers in one way or another. GO bonds (for the first time) are being lumped in with the revenue bonds and bonds not fully backed by full faith and credit of Detroit. Pensions are implied to be equal to bonds but all this needs to get worked out.

Bond insurance will now probably become more expensive and less available for issues not highly rated.

Muniipalities and states (to a lesser extent) are rather opaque. Liabilities can be carefully hidden that can suddenly lower the credit rating or make the municipality default. A large employer can suddenly move or go out of business that can sink an otherwise solvent municipality. I have personally stopped buying municipal bonds or muni-bond funds. With what I'm seeing, it's no longer worth the risk.
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