The Detroit bankruptcy — the largest municipal bankruptcy in U.S. history — has financial experts and economic developers on the western side of the state wondering if there will be any ripple effects here, and if so, what?
“The two most impacted parties right now will be the retirees (who worked for the city of Detroit), through either their pension payments or their health care benefits. And then, the bond holders,” said Mitch Stapley, chief investment officer at the Fifth Third Bank Asset Management group in Grand Rapids.
Stapley, who has been featured on Bloomberg, CNN and NBC for his insight into the investments market, is quick to emphasize Chapter 9 filings are rare, “and we don’t have a playbook on how this one’s going to unfold.”
According to the United States Courts website (www.uscourts.gov), Chapter 9 of the U.S. Bankruptcy Code provides for financial reorganization of municipalities, including counties, cities, villages, school districts, water districts, etc. The law was passed in 1934 as a result of the Great Depression and has been amended several times. There have been fewer than 500 municipal bankruptcy filings, with the largest prior to Detroit being Orange County, Calif., in 1994.
According to Stapley, the Detroit bankruptcy came as no surprise to the financial world, and so far, the immediate impact on the Michigan bond market has been “modest.” He said the municipal government of Detroit has been in a “death spiral” for 40 years.
“This has to be the most widely anticipated bankruptcy in the history of municipal finance,” he said.
The cost of floating a 10-year Michigan municipal bond increased after the Detroit filing by about 10 basis points, he said, with the interest rate increasing from about 2.5 percent to about 2.6, which Stapley describes as a “modest widening.”
“It’s clearly wider, but is it traumatic? No,” he said.
“It’s not like people are abandoning Michigan paper,” said Stapley.
Detroit’s uninsured “paper” (municipal bonds) prior to the filing were rated just above D, he said, but now are at D. They trade very infrequently and sell now for “probably around 25 or 27 cents on the dollar.”
“We haven’t bought Detroit paper in probably 30 years,” said Stapley.
It is mainly hedge funds that would be interested in buying uninsured paper like Detroit’s, he said, in the hope that the judge overseeing the bankruptcy proceedings might ultimately decide to set their value a little above what the hedge fund paid for them.
There is some good news about Detroit bonds.
“A lot of the water and sewer bonds in Detroit, a lot of the GOs (general obligation) out there, are insured. That’s good news,” he said.
Fifth Third staff has determined so far that 75 or 80 percent of the Detroit bonds were insured. Those bonds are trading for around 60 or 70 cents to the dollar. If the bond holder is willing to hold on to an insured bond until maturity to collect the full amount, it could be many years away.
“We’re trying to collect a lot of data on this from a lot of different sources. And again, it’s only a week. But the high degree of insured bonds out there is good news to the bond holders,” he said.
The uncertainty in the market right now can put some pressure on the Michigan municipal bond rates, but Stapley said the market will differentiate between the different cities and counties where bonds originate.
West Michigan government entities that routinely float bonds, such as sewer and water districts and school districts, need not be worried, he said. “They’ll be fine.”
Birgit Klohs, president and CEO of The Right Place economic development organization in Grand Rapids, said Michigan needs a “healthy Detroit,” adding the bankruptcy filing was unavoidable but “allows the city to begin taking action and driving restructuring and revitalization efforts in a positive direction. Where most see difficulty and challenge, smart businesses see opportunity. The private business sector continues to invest in Detroit. We strongly believe that West Michigan’s economic growth and vigor will continue as Detroit works through its economic challenges. The state of Michigan is on an economic recovery course, and I am confident that this next chapter in Detroit’s future will set the city on that same course.”
Rick Baker, president and CEO of Grand Rapids Area Chamber of Commerce, said Grand Rapids, West Michigan and the entire state have a vested interest in Detroit’s success.
“We are fully supportive of this difficult action that had to be taken to continue Detroit’s economic resurgence. Under Gov. Snyder’s bold leadership, Michigan has experienced tremendous economic growth, outpacing the country in job creation and being named the eighth most competitive state by Site Selection magazine. Michigan is the comeback state and will remain a smart investment. This difficult but necessary financial decision will position Detroit and all of Michigan for continued economic growth.”
In Warren, the president and CEO of the Michigan Business and Professional Association said Detroit’s Chapter 9 filing may be a blessing in disguise for Detroit’s business community.
“The business community long ago committed to re-developing the city of Detroit,” said Jennifer Kluge. “While the city’s path forward is no longer in doubt; now public officials must follow the direction of the court and finally address long-simmering financial issues, which means that private sector leaders can proceed with their plans knowing that the city’s financial issues are being addressed.”
Kluge pointed to a number of signs she said prove businesses both large and small are committed to keeping Detroit alive:
- Corporate Real Estate magazine named Wayne County Economic Development one of the nation’s top-performing economic development organizations, citing 10,582 new jobs and $2.2 billion in capital investment in Detroit in 2012.
- Detroit was No. 5 on the 2012 list of fastest-growing tech cities, according to tech job site Dice.com. It was No. 1 in 2011.
- Major food retailers Meijer and Whole Foods are building new stores within Detroit’s boundaries — the first for any major retailer in many years.
- State officials are moving forward with the new International Trade Crossing across the Detroit River and the M-1 Rail Streetcar project.
- Local business leader Dan Gilbert has purchased 22 properties over the last three years through his Rock Ventures entity.
- The renovation of historical business buildings, apartments and hotels in Downtown and Mid-town seems to be picking up steam.
“These developments are continuing because Detroit has a lot of spunk, on top of its reasonably priced talent and real estate,” Kluge declared.
The Detroit municipal bankruptcy, due to its rarity, historic nature and sheer size, “will be an endlessly fascinating process … and it’s unfolding right in front of us,” said Stapley. “We have very little precedent to judge just what will happen here.”