Three major bond insurers appear to be working with Detroit's emergency manager to gauge their liability in the midst of the city's bankruptcy filing last Thursday.
Ambac Assurance Corp., Assured Guaranty and MBIA's National Public Finance Guarantee Corp. hold a total of more than $3.7 billion in municipal bond exposure to Detroit and its authorities. Should the city decide not to make good on its bond obligations—or a portion of it— the carriers would be on the hook to pay bondholders.
The city's Emergency Manager, Kevyn Orr, has proposed bondholders take a haircut as part of the Chapter 9 bankruptcy filing, to which the insurers object. At least one insurer, Ambac, argued publicly back on July 8 that the failure of both the city and state to protect General Obligation bonds would be harmful to both the city and bondholders.
“A successful revitalization of the city will be dependent upon its ability to access cost-effective financing in the future,” said Ambac at the time. The bankruptcy action would imperil the city's ability to do so. The carrier says it is “short sighted” for city officials to signal to lenders that they cannot trust Detroit to honor its obligations.
The Wall Street Journal says up until Thursday's bankruptcy filing, the insurers were negotiating with officials about restructuring the city's debt, estimated at $18-$20 billion.
MBIA released a statement from National's Chief Risk Officer Adam Bergonzi saying that while it considers the bankruptcy filing “unfortunate,” the company will uphold its obligations to bondholders “on time and in full.” He says the insurer submitted “a constructive proposal” that would have provided significant debt service relief, long-term savings and access to the capital markets, prior to the filing. Bergonzi says the carrier continues to speak with Orr and his team to find “a mutually beneficial solution to Detroit's many challenges.”
Assured says that despite the filing, it is prepared to work with all parties involved to achieve “a fair and equitable resolution for all parties.”
Ambac declined further comment.
Of the three carriers, Ambac appears to have the least total bond exposure at $170.3 million, with $92.7 million exposed to Detroit Limited Tax GO and $77.6 million to Detroit Unlimited Tax Go.
Assured says it has more than $2 billion in exposure: $1 billion to the city's sewer revenue bonds, $793 million of water revenue bonds and $321 million in general obligation exposures. Assured says the water and sewer projects extend beyond the city's limits and there is a pledge to pay these bonds with “special revenues” that should insulate them from the city's financial woes.
National's exposure is the largest at close to $2.5 billion. More than $2.2 billion of the exposure is to water and sewer revenues and in excess of $100.7 million covers general obligation exposure. The remainder covers municipal building projects. National says water and sewer authorities secure the bonds with distinct revenue streams.
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