Municipals drop but outperform sinking Treasuries; Detroit bankruptcy not trend, panelists say

By Sheri Kasprzak

New York, July 30 – Municipals ended the day on a sour note, following but outperforming a diving Treasuries market in the wake of positive gross domestic product data, market insiders said.

Strong demand kept yields from plummeting as far as Treasury yields did, said one trader, but yields were seen higher by 3 basis points to 5 bps across the curve.

Meanwhile, the 10-year Treasury yield jumped by 9.5 bps, the 30-year bond yield climbed by 8.5 bps, and the five-year note yield rose by 7 bps.

Detroit filing isn’t trend

Elsewhere in the market Wednesday, S&P Capital IQ held a webcast in which panelists discussed Detroit’s bankruptcy filing a year later. The filing has sparked a lot of questions about how future bankruptcies might be handled, but the bottom line seems to be that it is not indicative of a trend.

“Detroit G.O. bonds are currently rated D and have been since last October,” said Jane Hudson Ridley, senior director with Standard & Poor’s Ratings Services.

“We’ve taken seven rating actions over the past 14 years, all negative. G.O.s have been non-investment grade for about five years.”

Hudson Ridley noted that Detroit has faced years of hardships, including population decline coupled with fiscal mismanagement.

Additionally, S&P rates the city’s water and sewer debt CCC. The credit remains on Credit Watch negative as the authority considers a distressed exchange, Hudson Ridley said.

“We don’t think issuers are more likely to file for bankruptcy or default because of this,” she said.

“There’s not an uptick in bankruptcy filings or defaults. There are, as we’ve said for some time now, isolated pockets of distress. Detroit was one of them. They’ve been on a downward trend for quite some time.”

Pensioners outrank bondholders

In Detroit’s bankruptcy plan of agreement, pensioners would lose only 4.5% of pension benefits and receive no cost-of-living increases. “It’s a rare instance, said Rad Lukic, director of S&P Credit Solutions.

“I’ve never seen something like that before,” Lukic said during the webcast.

By contrast, holders of Detroit limited tax G.O. bonds will only get back about 34 cents on the dollar. Holders of unlimited tax G.O. bonds will retrieve about 74.5 cents on the dollar.

Unsurprisingly, retirees have approved this plan of action, whereas limited tax G.O. bondholders refused to accept a 10% recovery but agreed to a 34% recovery plan. Water and sewer bondholders rejected the plan.

Lukic said he believes the lesson that can be taken away from Detroit’s bankruptcy and recovery process is that many governments are increasingly forced to choose between essential functions and other obligations.

“For years, it was suffering population loss on top of fiscal mismanagement and mounting pension costs,” he noted.

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