Detroit files for bankruptcy - FT.com Detroit filed for Chapter 9 bankruptcy on Thursday, in the largest such action by a US city. The filing came in the face of a lack of progress restructuring about $11bn of the city's $18bn in debt from unsecured creditors. Detroit is being watched for clues on how a heavily indebted municipality can regain its financial footing. The city is near the statutory limits of its ability to tax. That power has been sapped by a drop in the city's population - down 60 per cent from almost 2m at the peak in the 1950s to just under 700,000 - leading to a 40 per cent drop in tax revenues since 2000. The city has had to borrow money to meet its operating budget which has been slashed. "If we don't reach concessions, we will pull the trigger and we are not reaching concessions at the rate needed," Kevyn Orr, appointed Detroit's overseer in March, said. However, it is not clear how widespread the ripple effects from Detroit's bankruptcy filing will be. Matthew Cullen, president and chief executive of Rock Ventures, which has spent more than $1bn buying property in downtown Detroit, said the city had been "structurally bankrupt for a long time. Now we are no longer in denial. Mr Orr was appointed to his post by Michigan's governor. It is his task to put the negotiations on a more technical, less political footing. But given that some of the creditors, especially the unions whose healthcare and pension benefits are being restructured, are also the city's voters, the process is inherently political. Unsecured creditors have resisted Mr Orr's efforts to treat all creditors on an equal footing, which could lead to large reductions in the value of their claims. Holders of so-called general obligation bonds insist their claims are backed by the city's taxation powers, while pension fund holders believe their rights are constitutionally protected and should have priority. "To treat holders of general obligation bonds backed by the full faith and credit of a sovereign entity as unsecured and impaired has implications for the municipal market," said Peter Hayes, BlackRock's head of municipal bonds who has a $25m slice of Detroit's debt. Detroit's Chapter 9 filing could also hit the business models of companies that provide insurance on municipal bonds. "If issuers come out with their hands out asking for restructuring, it will lead to questions about the viability of the insurers," one creditor says. Detroit's last five debt offerings were done on a secured basis, suggesting that investors were nervous of the city's finances, according to a state official. Meanwhile, its issues that were not secured by collateral or pledges of revenue streams carried a relatively generous coupon, suggesting that the bonds were riskier than those of other municipalities. In June 2009, Moody's downgraded Detroit's unlimited tax general obligation bonds to below investment grade. Its ratings are now the third lowest in the 21-level ratings universe. Creditors say their worst case recovery would involve getting back 75 to 80 cents on the dollar. Some analysts believe Detroit should not have been allowed to raise debt from the capital markets. "Nobody did any real credit analysis; investors enabled Detroit's bad behaviour," says one person involved in the negotiations. If the markets refused to keep lending, Detroit would have been forced to deal with its problems a lot sooner. "Buyers never cared to do their own due diligence because most issues were insured," this person adds. Meanwhile, the insurers never thought it possible that a major city could go into Chapter 9, and just took fees for providing credit enhancement that they thought [were] riskless. Mr Orr says when he arrived he thought initially the city's debt was $14bn but now says it is at least $18bn and could be $20bn. Somehow major obligations were inexplicably left out of calculations he says. The obligations that Mr Orr proposes to treat equally include about $2bn of general obligation bonds and other financings, $3.5bn in pension liabilities that are underfunded and about $5.7bn of unfunded other post employment benefit liabilities. For Mr Hayes, though, the lack of visibility on the matter suggests the limits of due diligence. "If the city did not know the full extent of the liabilities, how could an investor know?" he asks. Before 2008, everybody got money more easily, both cities and companies" says Dave Meador, chief financial officer of DTE, the utility company which is taking over responsibility for the city's street lights and much of its power. At some point it was inevitable that the government would lack the resources to repay the debt.