Detroit to default on $2.5B of debt

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: Detroit to default on $2.5B of debt

Post by umfundi » Fri Jul 19, 2013 8:49 am

jack1719 wrote:Bondholders are gonna be the ones that take the biggest haircut,retirees with pensions etc...judges seem to understand that these are real people,alot of elderly etc.. and very little if anything will pensioners be asked to cut,a judge might feel the need for everyone to contribute to cutbacks,so he might make a tiny cut to them,but if you look at cases in other towns that have filed for bankrupty,its gonna be pretty much that same path...GM bankruptcy retires,pensionsers etc..pretty much got off scott free,it really didn't have to do with bailout money either.

the big question is how much of black eye will this be to bonds and bond holders now and in future..
Except, in the Delphi bankruptcy, salaried retirees lost up to 60% of their benefit when Delphi dumped them to the PBGC.

Note that there is no government PBGC guarantee for Detroit pensions. The lawsuits claim that they are protected by the State constitution. We shall see.

Keith
Déjà Vu is not a prediction

User avatar
Rainier
Posts: 1325
Joined: Thu Jun 14, 2012 5:59 am

Re: Detroit to default on $2.5B of debt

Post by Rainier » Fri Jul 19, 2013 9:08 am

jack1719 wrote:Bondholders are gonna be the ones that take the biggest haircut,retirees with pensions etc...judges seem to understand that these are real people,alot of elderly etc.. and very little if anything will pensioners be asked to cut,a judge might feel the need for everyone to contribute to cutbacks,so he might make a tiny cut to them,but if you look at cases in other towns that have filed for bankrupty,its gonna be pretty much that same path...GM bankruptcy retires,pensionsers etc..pretty much got off scott free,it really didn't have to do with bailout money either.

the big question is how much of black eye will this be to bonds and bond holders now and in future..
Maybe for corporates, but not munis. Kind of like student debt, it never really goes away. Once all the other obligations are wiped away the muni debt would be easy to service.

User avatar
SpringMan
Posts: 5344
Joined: Wed Mar 21, 2007 11:32 am
Location: Michigan

Re: Detroit to default on $2.5B of debt

Post by SpringMan » Fri Jul 19, 2013 9:16 am

It will be interesting to see what happens, if anything, to the Detroit Zoo and Detroit Art Institute. I believe there is a millage accessed in the taxes of the Detroit suburbs to help support these. Of course, the Detroit Zoo is not even located in Detroit.
Best Wishes, SpringMan

SPG8
Posts: 357
Joined: Tue Mar 29, 2011 10:27 am

Re: Detroit to default on $2.5B of debt

Post by SPG8 » Fri Jul 19, 2013 9:32 am

nm - repeat
Last edited by SPG8 on Fri Jul 19, 2013 11:45 am, edited 1 time in total.

jack1719
Posts: 361
Joined: Tue Mar 23, 2010 6:43 pm

Re: Detroit to default on $2.5B of debt

Post by jack1719 » Fri Jul 19, 2013 9:56 am

This is gonna drag on and on possibily for several years,your gonna have Bond holders,pensioneers,insurers etc..all gonna sue..this could in a sense end up all the way to the supreme court in a few years..Thats one reason when GM filed for bankrupcy the government was involved heavily,they knew a dragged out bankruptcy would have been awful for the economy and financial crisis..

When all is said and done unions/pensioneers and bondholders might own 70% of Detroit..they will scope up anything worth asset value ..similar to the union now owning a huge part of GM

jack1719
Posts: 361
Joined: Tue Mar 23, 2010 6:43 pm

Re: Detroit to default on $2.5B of debt

Post by jack1719 » Fri Jul 19, 2013 10:27 am

Bondholders are gonna be the ones that take the biggest haircut,retirees with pensions etc...judges seem to understand that these are real people,alot of elderly etc.. and very little if anything will pensioners be asked to cut,a judge might feel the need for everyone to contribute to cutbacks,so he might make a tiny cut to them,but if you look at cases in other towns that have filed for bankrupty,its gonna be pretty much that same path...GM bankruptcy retires,pensionsers etc..pretty much got off scott free,it really didn't have to do with bailout money either.

the big question is how much of black eye will this be to bonds and bond holders now and in future..


Except, in the Delphi bankruptcy, salaried retirees lost up to 60% of their benefit when Delphi dumped them to the PBGC.
----------------------------------------------------------------------------------------------------------------------------------

Those Salaried employees at Delphi were non-union....You had no shield of protection under union statues and laws..and they paid for being non-union

Grt2bOutdoors
Posts: 17997
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Detroit to default on $2.5B of debt

Post by Grt2bOutdoors » Fri Jul 19, 2013 11:05 am

jack1719 wrote:Bondholders are gonna be the ones that take the biggest haircut,retirees with pensions etc...judges seem to understand that these are real people,alot of elderly etc.. and very little if anything will pensioners be asked to cut,a judge might feel the need for everyone to contribute to cutbacks,so he might make a tiny cut to them,but if you look at cases in other towns that have filed for bankrupty,its gonna be pretty much that same path...GM bankruptcy retires,pensionsers etc..pretty much got off scott free,it really didn't have to do with bailout money either.

the big question is how much of black eye will this be to bonds and bond holders now and in future..
Don't be so sure about that, I recall a recent case where I believe a town had the same problem,not sure if it was in the midwest someplace, revenues dropped and could not be recouped, forcing the town to file for bankruptcy, the retirees took it on the chin, lost their healthcare and a story about the local retired fire chief being forced to move in with someone due to his inability to pay his own bills as a result of the severe haircutting of his pension. It's happened before, so don't think "real" people can not be affected by situations like this. It's a very real possibility.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: Detroit to default on $2.5B of debt

Post by umfundi » Fri Jul 19, 2013 11:10 am

jack1719 wrote: Except, in the Delphi bankruptcy, salaried retirees lost up to 60% of their benefit when Delphi dumped them to the PBGC.
----------------------------------------------------------------------------------------------------------------------------------

Those Salaried employees at Delphi were non-union....You had no shield of protection under union statues and laws..and they paid for being non-union
I happen to be a GM salaried retiree.

GM has already given health care to the UAW. It will be interesting when they try to also pass on the pension obligations. The UAW could end up being an insurance company!

Keith
Déjà Vu is not a prediction

User avatar
nisiprius
Advisory Board
Posts: 35468
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Detroit to default on $2.5B of debt

Post by nisiprius » Fri Jul 19, 2013 11:13 am

reason-logic wrote:Remember, even if a Detroit bond is insured, you also need to look at the health of the insurer. There are huge muni defaults in San Bernardino, Stockton, Jefferson County now Detroit. So a weak insurer with exposures to all of these might not have capacity to pay (this is not like the FDIC) so you need to look at the health of the bond insurer in order to judge the risk of owning these bonds, even if insured.
As I noted in another thread, for whatever it's worth, the ratings agency take that into account when rating the bonds.

Because of the insurance, they gave these bonds solid investment-grade ratings: Moody's A3, S&P AA-, somewhere in the middle of the A range. They think the insurers are healthy and that the insured bonds are OK.

The "Underlying" ratings, i.e. what they would be if not insured for the water and sewer bonds are B2 and BB-, i.e. shaky; for the general obligation bonds, Caa3 and CC, i.e. deep trouble.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Beagler
Posts: 3442
Joined: Sun Dec 21, 2008 7:39 pm

Re: Detroit to default on $2.5B of debt

Post by Beagler » Fri Jul 19, 2013 11:25 am

"There's no reason for a bondholder to feel like there's any type of security" when investing in Detroit bonds, said Dan Solender, director of municipal-bond management at investment firm Lord Abbett & Co., which owns some Detroit bonds.
http://finance.yahoo.com/news/detroit-b ... 00133.html

As a conservative investor, I would steer far clear of any such bonds, no matter who the insurer.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

jack1719
Posts: 361
Joined: Tue Mar 23, 2010 6:43 pm

Re: Detroit to default on $2.5B of debt

Post by jack1719 » Fri Jul 19, 2013 11:32 am

Beagler wrote:"There's no reason for a bondholder to feel like there's any type of security" when investing in Detroit bonds, said Dan Solender, director of municipal-bond management at investment firm Lord Abbett & Co., which owns some Detroit bonds.
http://finance.yahoo.com/news/detroit-b ... 00133.html

As a conservative investor, I would steer far clear of any such bonds, no matter who the insurer.
The problem is the infectious nature of this..how much fear it spreads to other larger cities..people don't think in vacuum when investing,,they will develop a mindset I should stay away from all muni bonds now for a long spell..especially if this drags on in the news for several years with being sued and legal fights galore

Beagler
Posts: 3442
Joined: Sun Dec 21, 2008 7:39 pm

Re: Detroit to default on $2.5B of debt

Post by Beagler » Fri Jul 19, 2013 11:42 am

jack1719 wrote:
Beagler wrote:"There's no reason for a bondholder to feel like there's any type of security" when investing in Detroit bonds, said Dan Solender, director of municipal-bond management at investment firm Lord Abbett & Co., which owns some Detroit bonds.
http://finance.yahoo.com/news/detroit-b ... 00133.html

As a conservative investor, I would steer far clear of any such bonds, no matter who the insurer.
The problem is the infectious nature of this..how much fear it spreads to other larger cities..people don't think in vacuum when investing,,they will develop a mindset I should stay away from all muni bonds now for a long spell..especially if this drags on in the news for several years with being sued and legal fights galore
If that has the result of raising muni rates, then it's OK with me.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

jdb
Posts: 1338
Joined: Wed Dec 05, 2012 8:21 pm

Re: Detroit to default on $2.5B of debt

Post by jdb » Fri Jul 19, 2013 9:04 pm

jack1719 wrote: the big question is how much of black eye will this be to bonds and bond holders now and in future..
Those of us who maintain individual muni bond ladders sympathize with Detroit residents but consider this a possible buy opportunity in muni bond market, depending on public hysteria. Waiting for the next Meredith Whitney to proclaim this is harbinger of things to come.

umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: Detroit to default on $2.5B of debt

Post by umfundi » Sat Jul 20, 2013 3:26 am

jack1719 wrote:Those Salaried employees at Delphi were non-union....You had no shield of protection under union statues and laws..and they paid for being non-union
You might wish to contemplate the number of Delphi UAW employees pre- (tens of thousands) and post- (many hundreds) bankruptcy.

Detroit pensions do not have a PBGC safety net (for what that's worth)*. The State of Michigan seems to think a state constitutional guarantee of Detroit pensions is worth discussing in court.

Keith

* The PBGC guarantee is not bad for those of full retirement age. The guarantee depends on your age when the plan is turned over, NOT on your age when you retired. I retired from GM at age 58, a few months before they went into bankruptcy. If they had then turned over their obligations to the PBGC, I would have received only 60%, or less.
Déjà Vu is not a prediction

Post Reply