Detroit eligible for bankruptcy protection

A federal judge’s ruling that Detroit is eligible for bankruptcy protection offers municipal bond investors a dose of clarity that could be welcome news at the end of a rough year for the US municipal debt market.

If Tuesday’s ruling is upheld by an appeals court, it will allow the insolvent Michigan city to push ahead with creditor negotiations over how to restructure debt, which the US federal judge said includes public pension liabilities.

Retail investors might view the Detroit ruling as another frightful headline in a year when the value of their municipal portfolios declined.

Nonetheless, some portfolio managers and analysts saw approval of the bankruptcy filing as a positive development that will eventually provide more certainty about a host of unresolved questions, in particular how various kinds of municipal debt and liabilities are treated in bankruptcy.

“If it had been dismissed I think there would have been a lot of chaos,” said James Colby, chief municipal strategist at
Van Eck Global.

“There is a structure in place,” he said. “That’s a better result than the alternative.”

The ruling can also be seen as a signal to creditors – in particular public sector labour unions and pension funds – and Detroit’s emergency manager Kevyn Orr that they need to go back to the negotiating table, according to Dan Heckman, senior fixed-income strategist at US Bank Wealth Management.

“The market can take some bit of positive out of this,” he said.

Negative headlines

He also noted that while retail investors remain leery in the wake of negative headlines, they should take heed that
Illinois finally appears to be nearing a deal to reform it’s pension funds, which comprise the worst-funded state retirement
system in the country.

“Today was a ruling that was widely expected by the market, but it’s going to take a while to digest exactly what it means,” said Peter Hayes, head of the municipal bonds group within BlackRock Fundamental Fixed Income.