TIME TO SEE WHETHER
DETROIT'S BIG BET ON
SHEDDING ITS DEBT PAYS OFF
By Stephen Henderson
February 10, 2014
Detroit Free Press
Presented by Kevin Spezia
Detroit’s Debt Problem
• Detroit is the nation’s first major city to
declare bankruptcy
• Has $18.5 billion in debt and other liabilities
• $9.3 billion in debt; $9.5 billion in pensions[4]
• $7 billion of secured debt[4]
• Currently spends 38% of revenue on debt[4]
• Will submit restructuring plan in bankruptcy
court on Wednesday[1]
Secured vs. Unsecured Debt
• Secured debt is backed by borrowers’
assets
• For cities, this may include future tax
revenues
• If the borrower defaults, these assets are
forfeit
• Because of its lower risk profile, secured
debt has lower interest rates
Debt Restructuring
• Detroit will ask to discharge much of its
debt, including some secured debt
• More money to focus on city services
• No problem for unsecured debt; can be
easily discharged in bankruptcy
• Secured debt usually cannot be discharged
in bankruptcy
• If it can, this may set a precedent that leads to
far more difficult municipal bond markets
Risk Pricing (CAPM)
Risk decreases profitability in lending; an increase in risk can be
thought of as similar to an increase in supplier prices. Image [3]
Sources
1.
2.
3.
4.
Detroit Free Press. Bomey, Nathan. “Detroit expected to file
bankruptcy restructuring plan next week”. February 10, 2014.
http://www.freep.com/article/20140210/NEWS01/302100084/.
Detroit Free Press. Henderson, Stephen. “Time to see whether
Detroit's big bet on shedding its debt pays off”. February 16, 2014.
http://www.freep.com/article/20140216/COL33/302160039/Detroitbankrutpcy-Kevyn-Orr-bankruptcy-plan-bondholders-debt-banks.
Econport.org. “Shifts Shown Graphically”. © 2006, Experimental
Economics Center.
http://www.econport.org/content/handbook/Equilibrium/shiftsgraph.html.
The Huffington Post. Woods, Ashley. “A Guide To Detroit's Chapter
9 Default And How Bankruptcy Could Change The City”. July 24,
2013. http://www.huffingtonpost.com/2013/07/24/detroitbankruptcy-chapter-9_n_3640734.html.