Detroit Slides From Industrial Might to Bankruptcy – by Steven Church, Dawn McCarty & Margaret Cronin Fisk (Bloomberg News – July 19, 2013)

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Detroit, the cradle of the automobile assembly line and a symbol of industrial might, filed the biggest U.S. municipal bankruptcy after decades of decline left it too poor to pay billions of dollars owed bondholders, retired cops and current city workers.

“I know many will see this as a low point in the city’s history,” Michigan Governor Rick Snyder, a Republican, said in a letter yesterday authorizing the filing in U.S. Bankruptcy Court in Detroit. “Without this decision, the city’s condition would only worsen.”

Michigan’s largest city joins Jefferson County, Alabama, and the California cities of San Bernardino and Stockton in bankruptcy. The filing shattered the presumption of many bondholders that local governments, eager to continue borrowing at reasonable rates, would do whatever it took, including raise taxes, to come up with the money to meet bond obligations. Kevyn Orr, the city’s emergency manager, said the debt is $18 billion.

While under court protection, Detroit can stop paying some debts, is temporarily immune from most lawsuits and may be able to ask a judge to cancel contracts, including union agreements. Under Chapter 9 of the U.S. Bankruptcy Code, the first step is likely to be a court fight over whether the city was entitled to bankruptcy protection, a challenge that would ask if the city was truly insolvent and it had no alternative to filing.

‘Early Intervention’

Detroit’s filing “is going to affect a number of local governments around the country,” said Keith W. Mason, a bankruptcy attorney with McKenna Long & Aldridge LLP. “It calls for greater early intervention.”

In trading yesterday, investors demanded higher yields to buy Detroit debt rather than top-rated municipals. Unlimited general-obligation bonds maturing April 2028 traded with an average yield of 5.73 percent, about 2.3 percentage points more than benchmark munis, data compiled by Bloomberg show. That’s the biggest yield gap since June 24. The bonds are insured by Assured Guaranty Ltd. (AGO)

The city that gave the world the Model T and fueled the American love affair with tailfins, chrome fenders and big-block V-8 engines began a long decline in the middle of the last century as U.S. carmakers began moving production out of town, and many residents followed. The stomping grounds of Harley Earl, who helped make the Chevrolet Corvette, and Marvin Gaye, a mainstay of Motown music, emptied as the suburbs swelled. Now the city is plagued by barren lots and empty buildings.

Population Decline

Its population, which peaked at 1.85 million in 1950, has declined to about 700,000, according to U.S. Census data. Manufacturing jobs fell from about 296,000 in 1950 to fewer than 27,000 in 2011. About 60,000 properties in the city, or 15 percent of all parcels, were barren and at least 78,000 buildings were vacant, including 38,000 deemed potentially dangerous, Orr said in a report this year.

Median household income was less than $28,000, compared with $49,000 statewide, and more than 36 percent of residents lived in poverty, 2011 Census data show. The median home value of $71,000 was barely half the $137,000 value statewide.

Orr, 55, filed for bankruptcy after asking creditors owed more than $11 billion to accept just $2 billion in new notes in exchange for canceling their debt. That debt includes about $2 billion in what Orr claims are unsecured bonds and billions more in pension, health-care and other obligations owed to current and former city workers.

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