April 14 (Bloomberg) — Bankrupt Detroit's agreement with bondholders to pay 74 percent of general-obligation unlimited tax debt is a credit positive because it elevates it to secured status, according to Moody's Investors Service.
The deal struck last week is a sign of progress in negotiations to exit bankruptcy and would shift 26 percent of $388 million in claimed liabilities to pensions and to overdue payments on debt, according to the report today from Genevieve Nolan and James Eck.
State-appointed Emergency Manager Kevyn Orr earlier proposed a 15 percent recovery for general-obligation bondholders as unsecured debt. The new agreement helps bond insurers National Public Finance Guarantee Corp., Assured Guaranty and Ambac, Moody's said. Moody's rates Detroit debt Caa3 — nine steps into noninvestment grade — with a negative outlook.
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"Detroit's settlement with the insurers for 74 cents on the dollar is consistent with our recovery expectations for the city's GOULT bonds," according to the Moody's report. Less clear is what the settlement means for other liabilities, including general obligation limited tax bonds, the report said.
The settlement represents 2.7 percent of the city's $14.3 billion in outstanding claims, a small piece of a plan that must be further negotiated and approved by U.S. Bankruptcy Judge Steven Rhodes, the report says. It adds that the deal with the unlimited-tax bondholders could pave the way to a court-ordered "cram down" if other creditors balk.
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