Detroit’s plan to reduce its $18 billion of liabilities may derail the biggest wave of Michigan debt issuance since 2009 and elevate borrowing costs as investors renew focus on the state’s approach to bondholders.
Michigan Governor Rick Snyder’s formal declaration that a financial emergency besets Detroit started the clock ticking for city leaders who may want to try to block a state takeover. It gave them 10 days.
Michigan’s Finance Authority plans to sell $92 million of one-year notes backed by state aid for Detroit’s public schools in the first deal tied to the city since it sought bankruptcy protection July 18.
The yield penalty on Michigan’s debt has climbed 40 percent in less than two weeks as defaults by Detroit and two school districts lead investors to question the state’s commitment to protect bondholders.
Investors’ insistence on a yield 14 times higher than the AAA benchmark on $92 million of Detroit school notes is the latest example of municipal-bond market contempt for Michigan after the city’s record bankruptcy.
A delayed bond sale by a Michigan county that’s home to the birthplace of General Motors Co. shows how Detroit’s fiscal distress is penalizing local governments in the eighth-largest U.S. state by population.
Emergency Manager Kevyn Orr’s plan to suspend payments on $2 billion of Detroit’s debt threatens a basic tenet of the $3.7 trillion municipal market: that states and cities will raise taxes as high as needed to avoid default.