Sept. 18 (Bloomberg) -- Detroit may use hundreds of millions of dollars earmarked for required upgrades and repairs to its water and sewer system to pay debts it’s trying to restructure in bankruptcy.
Detroit’s emergency manager, Kevyn Orr, was asked in a Sept. 16 deposition whether he was considering using cash from the Detroit Water and Sewerage Department “to fund existing obligations rather than new capital improvements,” according to a transcript filed today in U.S. Bankruptcy Court in Detroit.
“We have examined a number of options and alternatives related to DWSD including those that might be implicated by your question,” Orr said. “I didn’t say that we would take any capital. I said we will -- we would consider it.”
Detroit filed the largest-ever U.S. municipal bankruptcy in July, listing debt of about $18 billion. The city has about $5.4 billion worth of water and sewer bonds that Orr has said would be paid in full. Creditors seeking a share of Detroit’s remaining cash may seek to nullify the bankruptcy by arguing the city isn’t really insolvent because it has access to more money than it claims, such as the water and sewer revenue.
The deposition was filed by unions and retirees challenging the city’s eligibility for federal bankruptcy court protection.
“Mr. Orr was responding to a hypothetical posed by an attorney representing city retirees and not elucidating on a plan currently under consideration,” Bill Nowling, a spokesman for Orr, said in an e-mail.
Orr also said in the deposition that restrictions in bond instruments or previous rulings from the bankruptcy judge may bar him from using water and sewer repair funds for anything else.
Separately, Fitch Ratings said in a report today that it expects Detroit to default on its general-obligation bonds on Oct. 1. The New York-based ratings company already cut the Motor City’s pension-obligation certificates to D in June after Orr announced it would miss a $39.7 million payment. A grade of D signals a failure to pay debt service.
“Detroit’s landmark bankruptcy sets the stage to confirm or challenge basic premises underlying municipal debt credit ratings,” Amy Laskey, a Fitch managing director, said in the report.
If Detroit’s case lumps general-obligation bonds with post-employment benefit payments, Fitch may “reconsider” municipal grades broadly, according to the statement. Fitch said there’s “substantial protection” for the city’s water and sewer debt.
The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).