Friday, June 14, 2013

Detroit Goes Into Default, Bankruptcy May Follow

Either EFM Kevyn Orr is trying to pull off the bluff of the century over Detroit's creditors, or the City is truly screwed - or both,

The Detroit News: Orr says bankruptcy decision could come within 30 days: 'We are tapped out'

In a surprise, Orr announced the city is temporarily stopping debt payments, including a $39 million bill due Friday to conserve dwindling city cash.

“We are tapped out,” Orr said.

In a brief meeting with reporters after the meeting, Orr said the session went well and is intended to provide a clear path of the city’s course of action moving forward.

"If we are able to restructure and get a deal in place, then we start paying on the new regime," Orr told reporters. "We can't continue paying with the debt service we have going forward."

In blunt language, Orr highlighted the root cause of the city’s decades-long path to insolvency and blamed the crisis on financial mismanagement that, if unchecked, will have the city spending 60 cents of every tax dollar on legacy costs such as retiree pensions and health care.

“Detroit’s road to recovery begins today,” Orr said. “Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin.”

And despite earlier fears, Orr did not propose selling beloved city assets such as the Detroit Institute of Arts’ collection or Belle Isle.

The plan calls for shared sacrifice among the city’s creditors, many of whom are being offered less than 10 cents on the dollar. Some unsecured creditors will get less than 10 cents on the dollar for about $2.3 billion in claims that Detroit will soon stop making payments on unsecured debt to save as much as $25 million per month in cash, which will be spent, instead, on essential city services. Employees and vendors will continue to be paid.

The failure to pay the $39 million is one helluva massive default by the city, as is the plan to stop paying to unsecured creditors $254 million each month. Detroit's creditors are paying for the decades-long financial mismanagement of the city's corrupt Democrat leadership. Failure to pay bond holders is a very serious act of default. Indeed, the rating agencies just downgraded the city's bonds to CC which is about as bad as it gets, leaving only grades C and D remaining.

Current and future unsecured creditors - i.e. the city's vendors will have no incentive to continue to do work or provide supplies to the city under these circumstances as they will likely never be paid or at best take a 90% loss on every sale made. That can't bode well for the city's operational stability.

Expect this situation to go downhill fast as this blue state model city's unraveling picks up speed.

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