When emergency financial manager Kevyn Orr filed his plans in late February to lift Detroit out of bankruptcy, his proposals drew fire from the municipal-finance industry. Investors, bond insurers, ratings analysts, and industry groups all balked at his terms.
That’s not surprising, since Orr, a private-sector restructuring expert, has used the Detroit bankruptcy to try to overturn years’ worth of precedent in municipal finance.
Even before Detroit went bankrupt, Orr made it clear that he would attack sacrosanct practices. Last June, he castigated holders of Detroit’s general-obligation bonds—traditionally considered among the safest kinds of municipal borrowing—for investing in the city for a decade, even as it went broke “openly and notoriously,” in his words. Though the usual assumption is that general-obligation bonds have the “full faith and credit” backing of a city or state, Orr said, he would regard Detroit’s bonds as unsecured—and he warned investors that they’d see deep cuts in any structuring plan. “They understood the risk,” he said.