Detroit ‘Crushing’ Debt Among First City Overhauls, Orr Says

Detroit’s bond payments are “crushing” the city by hindering spending on public safety and are among the first liabilities that need to be addressed, emergency financial manager Kevyn Orr said.

“The debt service that the city can’t bear is crushing it under its weight,” Orr said at a luncheon in New York for the bankruptcy and reorganization group of the UJA-Federation of New York, a Jewish philanthropic organization. “First order of business is to get a hold of our balance-sheet issues.”

Orr, 55, appointed by Republican Governor Rick Snyder in March, said in a report May 12 that the cost of $9.4 billion in bond, pension and other long-term liabilities is sapping the city’s ability to protect and transport its citizens. Orr listed reducing debt principal, retiree benefits and jobs among his options to avert a city bankruptcy.

The city of 707,000, Michigan’s biggest, has a Caa2 general-obligation rank from Moody’s Investors Service. That’s eight steps below investment grade. Orr’s report is “setting the stage for reductions to all stakeholders, including bondholders,” Moody’s said last week.

Investors in the $3.7 trillion municipal market have marked down city debt since Orr’s report. Tax-exempt Detroit general-obligation bonds maturing in April 2015 traded today at an average of 91 cents on the dollar, down from about 96 cents earlier in the month, data compiled by Bloomberg show.

‘Equal Treatment’

“I have to start meeting with many of the stakeholders, both on the labor side and on the credit side,” Orr said at the luncheon. Some of them were either in attendance or represented at the gathering of about 1,100 people, he said.

“I want to find a way for equal treatment for all creditors within their creditor class,” Orr said.

A lawyer who worked on the 2009 bankruptcy of the former Chrysler LLC, Orr has said he hopes to keep Detroit from seeking court protection by negotiating with creditors and reining in retirement costs. He has the authority to change or cancel employee union contracts under certain conditions.

Michigan Treasurer Andy Dillon has said he’s been told Detroit would be the largest U.S. municipality to declare bankruptcy.

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