<p>It doesnt really work that way…</p>
<p>If the finances of Detroit are fixed…there will be buyers of bonds from Detroit. There are firms betting on the Detroit bonds that already exist. </p>
<p>Look at Argentina…or Russia or Mexico… These countries are able to sell bonds after major problems.</p>
<p>From sax’s link… There are 18 to 20 billion in outstanding bonds and the pension shortfall is 3.5 billion based on projections I dont know.</p>
<p>[Investors</a> in Detroit municipal bonds are nervous - Municipal Insider](<a href=“MunicipalInsider.com is available at DomainMarket.com. Call 888-694-6735”>MunicipalInsider.com is available at DomainMarket.com. Call 888-694-6735)</p>
<p>5.5%? When are the bonds mentioned due?</p>
<p>“Amid reports that the city is going broke and may need an emergency manager, Leon Pedell, a retired physician in Orchard Lake, said he has been in contact with his broker and bond management service about his Detroit water and sewer bonds. They are returning 5.5% tax-free at the state and federal level, but is there risk?
“You never used to worry about munis,” Pedell said. “There’s nothing like a risk-free bond any more.”
Pedell said he has been advised to hold steady now and that he may be able to keep the bonds until maturity without losing money.
Detroit is considered to be the largest U.S. city rated below investment grade. But some municipal bond experts say that investors should be able to ride it out — if they don’t need to sell those bonds early. Much depends on the type of bonds, with water and sewer considered as an essential service bond and less risky than Detroit’s general obligation bonds.”</p>
<p>Bond holders take a risk/reward position and it’s fair they get a good haircut. As for the individuals, the fact that pensioners were given 13th month checks that weren’t part of the contract when the market did well, not to mention “free money” to present workers, makes it reasonable that they take a hit when things aren’t going well.</p>
<p>Thats a 2011 article, dstark. </p>
<p>After bankruptcy how much would you be willing to put into Detroit general obligation bonds given Lergnom 99% reduction in principle? And what would you expect as a rate of return for that investment that can essentially go to zero?</p>
<p>I think the article says 2013. </p>
<p>If the bonds are trading for $ 10 with a chance to go to zero…it would depend on the probability of various returns and how long I would have to hold the bonds to figure out how much I would pay. </p>
<p>To keep it simple…1 year…if there was a 90 percent chance I would lose $10 and a 10 percent chance I could make $200 ( the bonds trade for .20 on the dollar…I should buy the bonds for $10.</p>
<p>Look at the bottom of the article- it says 2011. Plus it says " One municipal bond research group said a downside already is the assault on the state’s emergency manager law, which could preclude Gov. Rick Snyder from invoking it for Detroit." which is a past tense thing. </p>
<p>You are complicating things by talking about the after-market on existing bonds. Essentially those are vulture scraps. The real question is the new operating capital. </p>
<p>Detroit needs new capital to bridge its budget gap. What rate of return would encourage you to invest in an new issue of $400M/20year bonds in 2014/15?</p>
<p>Detroit put all its manufacturing eggs in one basket so to speak---- the auto industry. Made it even worse when the economy tanked.</p>
<p>Argbargy, It depends on the finances of Detroit. The collateral. What kind of bonds. How the existing bonds are treated in the bankruptcy.</p>
<p>You asked me if I would buy the existing bonds after they were knocked down 99 percent in price. I gave you an explanation. There are circumstances where I would buy Detroit bonds.</p>
<p>After Detroit reorganizes, firms are going to buy Detroit bonds.</p>
<p>There are many different kinds of bonds. The GO bonds are unsecured. Where are they trading? I am sure they are discounted.</p>
<p>I think there are some water and sewage bonds of detroit that are trading above par. Trading with a premium. Those bonds are fairly secure.</p>
<p>Yes the sewer bond have some security. </p>
<p>The question is in what circumstances would anyone ever buy the next round of GO junk bonds? </p>
<p>But its a moot question. If they walk away from the existing bonds I wont believe anyone until they post a screen shot of their position. And unless Detroit finds new investors they cant pay their obligations for the next years.</p>
<p>“But its a moot question. If they walk away from the existing bonds I wont believe anyone until they post a screen shot of their position. And unless Detroit finds new investors they cant pay their obligations for the next years.”</p>
<p>Do you believe Detroit wont find new investors and what do you base this on?</p>
<p>The supposition that they are going to return 0% on their exiting obligations. </p>
<p>Giving that policy, investors wont go near it, meaning they cant meet their going operating expense in the near future. Therefor they have no option but to give <em>all</em> creditors a haircut. </p>
<p>I have no intention of believing assurances any other scenario until people post a screen shot of their position in the next issue of DET munis. Talk is cheap until then.</p>
<p>You read something called Det munis?</p>
<p>Do you own munis?</p>
<p>People invest for the future…</p>
<p>I admit this is pr…but people invest for the future and if they think they will make money, they will invest.</p>
<p>"Orr said his goal is to eventually deliver to Mayor-elect Mike Duggan the best balance sheet a mayors had in 50 years if I do this right.</p>
<p>It was a note of optimism in whats expected to be a difficult process.</p>
<p>Mayor Dave Bing said the bankruptcy will ultimately be beneficial: Theres going to be a lot of pain for a lot of different people. But in the long run, the future will be bright.
[Bankruptcy</a> judge gives Detroit a chance to start over but at what cost? | Detroit Free Press | freep.com](<a href=“http://www.freep.com/article/20131203/NEWS01/312030161/Detroit-bankruptcy-eligibility-ruling-Steven-Rhodes-Kevyn-Orr?odyssey=obinsite]Bankruptcy”>http://www.freep.com/article/20131203/NEWS01/312030161/Detroit-bankruptcy-eligibility-ruling-Steven-Rhodes-Kevyn-Orr?odyssey=obinsite)</p>
<p>
Do you have a link to this story?</p>
<p>If the pension plan is 91% funded as tom1944’s article says, then it should be able to pay out 91% of benefits, right? A 9% cut is painful, but nowhere near an 84% cut.</p>
<p>One of those articles opined that the state’s constitutional pension guarantees means the the state will become liable for any shortfall. If so of Michigan’s taxpayers will wind up paying the difference.</p>
<p>I dont see any STORY that would lead me to kick the tires on this.</p>
<p>The Free Press boosterism is based on there being cuts to <em>all</em> obligations. That wasnt Lergnom’s recommendation at all. So its an entirely different thing. </p>
<p>Detroit revenue has been falling at 5% a year- in what scenario are you buying the next issue of bonds?</p>
<p>I’m sorry but there have been a number of simply, well, words escape me comments by argybargy. Do you actually know what Coleman Young said? Or did? I do. </p>
<p>He actually said this - and believe it or not, you could have taken 2 seconds and looked that up on wikipedia: “I issue a warning to all those pushers, to all rip-off artists, to all muggers: It’s time to leave Detroit; hit Eight Mile Road! And I don’t give a damn if they are black or white, or if they wear Superfly suits or blue uniforms with silver badges. Hit the road.” </p>
<p>I remember the day he said that. I remember his face and voice. And there was outrage in the suburbs, not because they thought he was telling white people to leave the city - which has become one of those ridiculous distortions - but because in the racially charged environment of those days, when the suburbs were whiter than today, many interpreted that as pitting the city against the suburbs. It was silly. He meant “get out of town” and the city limits happen to be 8 Mile. </p>
<p>I suggest actually looking things up rather than reciting them from someone passing along a story. Or you’ll end up believing that an 18 month old was denied health coverage and even stupider stuff.</p>
<p>As to business, Coleman Young drove GM’s Poletown plant forward though it required large demolition. He was about as pro-business as you can get. </p>
<p>And for the record, I really, truly dislike Coleman Young on many levels. (And that includes knowledge of attempts by the Feds to indict him.) But I try to look at him clearly and not through distorted political lenses. Young represented the shift from white to black control - and I knew the last white mayor a little. Though he took office well after white flight and after the decline was irreversible and 6 years after the riots and after the oil embargo crushed employment in Detroit, he was the first black guy in the job and was blamed for a lot that happened before he was there.</p>
<p>As to property tax, the millage rate - Michigan property taxes and many other taxes are in that form - is high in Detroit but not higher than many other poor places in the state. Why? Two big reasons. First, property values are low and second, many properties don’t pay. That means the needs of services require collecting more from fewer, which is part of vicious cycle that consumes poor areas: to keep the lights on, literally in many cases, they need to collect but the property values keep dropping and fewer people can afford to pay. I think the highest millage rates are in really sad places like Ecorse or River Rouge, places that have been totally devastated by the end of automotive work. They aren’t the cause but a symptom and now are part of the process of death.</p>
<p>As to municipal bonds, since I can no longer give mental charity to this thread, I mean specifically that too many bonds are issued by too many sources. Many authorities borrow - and these often become not specific revenue but general revenue bonds - and the liabilities can be stuffed in accounts that are, to the say the least, not exactly exposed to daylight. And many of the processes by which these borrowings occur are obscure at best so places end up with more debt than they can afford with interest rates that go up in ways they simply couldn’t anticipate because they relied on Wall Street to tell them how the obligations worked. </p>
<p>I also believe it’s a necessary reform to keep these governmental entities out of the sophisticated credit markets - like derivative swaps - because they should not be taking those risks. If pension actuarial accounting assumptions - like 8% standard return over time, etc. - are financial risks, then betting on derivative and other financial instruments is just as big or a bigger problem. At least with pensions, you can see if they have been funded, but with these risky instruments the history has been a sudden blowup and then “Oh my God!”. </p>
<p>In that context and that context only, I think it would send a good signal to the markets, not a bad one, to cram down bond and similar creditors substantially. To what degree, I don’t really know. I don’t even need to get into the way investors buy into these bonds low, sort of as vultures, and then rely on the law to cover for their risk taking. My feeling is “you took the risk … and sometimes you just plain lose”. </p>
<p>And I would sincerely ask argybargy to stop saying what I mean because I haven’t yet seen you say it correctly.</p>
<p>Argbargy, have you ever bought a muni?</p>
<p>I gave an example…</p>
<p>I will give you another example…</p>
<p>I dont have the numbers but this is the concept…</p>
<p>$10 billion in Detroit debt is restructured and now at maturity the bonds are worth $2 billion.</p>
<p>Detroit issues $1 billion in more debt</p>
<p>Detroit has decreased its debt by 7 billion and cut its interest costs by $350 million a year (if rates are 5%).</p>
<p>Maybe, I would buy the debt.</p>
<p>Depends how much Detroit’s revenues exceeds its costs.</p>
<p>When I buy munis…I want cash flow to be positive. The more likely the
cash flow is going to occur, the less coverage I need. I am pretty conservative so sometimes I am out bid. (the rates are too low for me).</p>
<p>A crisis brings opportunities, right?</p>
<p>You are too negative about future bond sales. ;)</p>
<p>I have a portfolio of corporate bonds and would like to buy munis (not Detroit, although any bond could be attractive at the right price) but every time I look at some, I can’t seem to pull the trigger. </p>
<p>The yields for A-rated bonds and higher only make sense for longer maturities. Unless you know you’re going to hold the bond to maturity, you need to reconcile the duration risk and the lack of liquidity for most tax-exempt issues. It is much easier finding decent yields for 5 to 8 year corporate maturities with above average credit profiles than munis. </p>
<p>I feel much more comfortable analyzing the financials (10-K) for a corporation than a municipality. The finances for municipalities or other private activity issues are very opaque and difficult to understand. Trying to decipher an official statement to determine the stream of revenues available for debt service is a challenging exercise. Regulatory oversight in this area is lacking in the tax-exempt world.</p>
<p>I am sure there is a way to analyze the credit risk for Detroit munis and make money on these issues if you buy them a the right price, but I wouldn’t recommend it unless you’re a professional.</p>
<p>A testament to the power of greed, corruption, and selfishness.</p>
<p>Thanks, Lergnom, for your summation of the Coleman Young years. I always appreciate your analyses/reflections about Detroit.</p>
<p>As to how much the pensioners will lose: despite all the (deserved) hand-wringing in the Freep and the News, no one really knows yet. Kevyn Orr has yet to decide:</p>
<p>[5</a> pension cut scenarios for retired Detroit workers; Orr mum on extent of cuts | Detroit Free Press | freep.com](<a href=“http://www.freep.com/article/20131203/NEWS01/312030138/Detroit-bankruptcy-Orr-pensions-cuts-plan-of-adjustment]5”>http://www.freep.com/article/20131203/NEWS01/312030138/Detroit-bankruptcy-Orr-pensions-cuts-plan-of-adjustment)</p>
<p>
</p>
<p>I am negative about future sales if Detroit follows advice of walking away from their existing obligations. And they better come up with some sort of plan to stabilize their revenue and lower their property tax.</p>