Detroit defaults on $600 million of unsecured bonds

October 1, 2013

Detroit on Tuesday defaulted on more than $600 million of general obligation bonds deemed unsecured by the city’s emergency manager, a city spokesman said.

The move marked the second bond default by the cash-strapped city after Kevyn Orr, the former corporate bankruptcy attorney who has been running Detroit since March, announced on June 14 a moratorium on unsecured debt payments.

Spokesman Bill Nowling confirmed the city did not make debt service payments due Tuesday on the unsecured GO bonds, including $411 million of voter-approved unlimited tax debt. However, payments were made on about $349 million of GO bonds deemed secured debt by the city, he added.

“Unsecured debts will be satisfied in the course of a plan of adjustment or by mutual agreement of the parties, and approval of the judge,” Nowling said, referring to Detroit’s bankruptcy filing.

With the city sinking under more than $18 billion of debt and other obligations, Orr on July 18 filed what would be the biggest Chapter 9 municipal bankruptcy in U.S. history. Orr has said that about $11.9 billion of that debt was unsecured, lumping GO bond creditors in with the city’s public pension funds and retiree health care.

The treatment particularly of voter-approved bonds is likely to be challenged in court unless mediation ordered by the court results in some kind of settlement.

Nowling did not supply the total amount of bond payments that were or were not made by the city. A spokeswoman for U.S. Bank, which receives and disperses payments for Detroit bond issues, declined to comment.

As trustee for Detroit bond issues, U.S. Bank was expected to officially notify bondholders of a default. The trust services of U.S. Bank are based in St. Paul, Minn.

Nowling also declined to comment on what the city planned to do with revenue from property taxes specifically levied for the payment of the voter-approved GO bonds. Diverting the money to pay for city operations would violate the Michigan Constitution, according to state constitutional experts.

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