Detroit’s bankruptcy is creating an opportunity for investors to profit from some of the city’s utility and essential services bonds, said NewOak Capital CEO and co-founder Ron D’Vari.
The city’s Chapter 9 filing creates new challenges, including the risk that certain revenue bonds could get caught in the restructuring litigation if they're classified as unsecured by the restructuring plan.
"The investors have traditionally viewed these as secured obligations separated from other unsecured liabilities of the municipalities," D’Vari explained.
He added, "However, as the Chapter 9 federal bankruptcy process has been rare and may intersect with many other laws of the city and state (including constitutional ones), a full legal analysis leaves a risk of unexpected outcomes."
While the Detroit bankruptcy has created some opportunities for distressed investors, it has created a bigger issue in investor confidence.
"While answers are still to be determined in the courts, it is clear that all muni bonds are not created equal and investors need to analyze more stressful conditions," D’Vari said.
He concluded, "There is a general hope that a side benefit of the credit crisis may very well be bringing back discipline to the public finance long term. This will call for better financial governance of municipalities as well as much more disciplined public finance capital markets."
