Detroit to Default on $2.5B Debt to Avoid Bankruptcy, Emergency Manager Says

Detroit said Friday it would stop making payments on about $2.5 billion in unsecured debt and ask creditors to take about 10 cents on the dollar of what the city owes them in a move to avoid what bankruptcy experts have said would be the largest municipal bankruptcy in U.S. history.

Detroit Emergency Manager Kevyn Orr spent two hours with about 180 bond insurers, pension trustees, union representatives and other creditors outlining his plan for the city’s financial future, which includes a moratorium on some principal and interest payments, Reuters reported.

Under his proposal, underfunded pension claims likely would get less than the 10 cents on the dollar.

An assessment of the plan’s progress will come in the next 30 days or so.

Orr also announced that Detroit stopped paying on its unsecured debt Friday to “conserve cash” for police, fire and other services in the city of 700,000 people. The debt not being paid includes $39 million owed to a certificate of participation.

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The team also said the proposal presented Friday is the one shot to permanently fix fiscal problems that have made the city insolvent.

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Detroit’s fiscal nightmare didn’t occur overnight. It’s been decades in the making as city leaders took out bonds at high interest rates to pay bills Detroit’s general fund couldn’t cover.

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The city’s budget deficit could top $380 million by July 1. Orr believes Detroit’s long-term debt is more than $17 billion.

The Washington-based bankruptcy attorney hired by Michigan in March reiterated that the chances of bankruptcy are 50-50 for Detroit, the largest U.S. city placed under state oversight.

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“The firefighters are going to do what we can to keep the city stable now,” Detroit Fire Fighters Association President Dan McNamara told reporters after Friday’s meeting with Orr.

McNamara said creditors were told by Orr that “we’re in a death spiral.”

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On Friday, Moody’s Investors Service downgraded a number of Detroit bonds, including its general obligation unlimited bonds. As a result, all Detroit bonds are now below investment grade.

Hetty Chang, a vice president with Moody’s, said “the emergency manager’s proposal to creditors indicates further debt restructuring.”

“We also believe the city’s risk of bankruptcy has increased over the last six months,” she said in a statement.