Munibond holders wait while the wrangling over who runs Detroit plays out. But market watchers say state intervention is the only hope for the Motor City.
Detroit's financial mismanagement has devolved into an ugly political morass, but the latest move by Michigan Gov. Rick Snyder is seen as a ray of hope for municipal bond investors.
Regardless of where you stand on the politics involved in a city drowning in debt and unable to pay its bills, the governor's plan to install a temporary emergency manager to try to fix the mess is good news to those with real skin in the game.
“For bondholders, this stabilizes the situation and also averts the possibility of an immediate bankruptcy filing,” said Eric Friedland, head of municipal credit research at Schroder Investment Research.
Muni bond investors have a singular focus, and tend to look beyond the fact that Detroit's mayor can't get along with the city council, and that Michigan's largest city has had multiple opportunities to address its spending and debt load, and that Democrats are viciously attacking the Republican governor's efforts to intervene.
For muni market wonks like Mr. Friedland, the emergency manager is the last and best option for a city with $15 billion worth of long-term pension liabilities and a swelling $327 million deficit.
“It's not great for a city government to have its power taken away," he said. "But they have had chances to fix it.”
Each state has its own laws regarding the use of emergency managers. In Michigan, the ability of the state to appoint emergency managers for struggling local governments goes back to 1988. Currently, a half-dozen cities operate under some form of oversight from Lansing.
While opponents make plenty of noise in protest of the law, it is worth noting that holders of all that municipal debt are praising the state for stepping in and helping where other states have simply let matters escalate to bankruptcy and default.
Just ask the citizens of places like San Bernardino, Calif. or Jefferson Country, Ala., where the states did not step in to help, if they feel they would have been better served by some state-level intervention.
“Certainly no other state has been challenged in the way Michigan has, and remarkably, Michigan has had no municipal bankruptcies, which is a credit to the way the state is handling matters,” said Richard Ciccarone, chief research officer at McDonnell Investment Management LLC.
Jim Colby, senior municipal bond strategist and portfolio manager at Van Eck Global, said opponents of the emergency manager should try to imagine Detroit under any other scenario.
“It would be a real disaster for Detroit to be put into bankruptcy because many of the measures would involve restating and rewriting labor contracts, and displacing unions,” he said. “The fact is, Detroit is very close to bankruptcy right now, and the whole thing is largely political, but the emergency manager will benefit Detroit and the surrounding suburbs.”
