U.S. Cities Watching Detroit Bankruptcy, Houston’s Mayor Says

Investors may shy away from debt issued by major U.S. cities if a Detroit bankruptcy plan holds that would treat bondholders as unsecured creditors, Houston Mayor Annise Parker said.

“If that is allowed to stand, the ability of cities to borrow money is going to be hugely impaired,” Parker said in an interview at Bloomberg’s Houston bureau yesterday. “All of the cities are watching really closely.”

Detroit, which filed the largest U.S. municipal bankruptcy in history in July, is seeking to lump bonds backed by taxes on voter-approved projects with other debts, such as pension payments owed to city workers.

Holders of such “unlimited” debt may get as little as 3 percent of their face value if the bankruptcy court rules the debt is unsecured, a precedent that would make municipal bonds far less attractive to investors, Parker said.

Houston has a bond rating of AA from Standard & Poor’s and Fitch Ratings. A Houston general-obligation bond maturing in 2023 traded at an average yield of 3.007 percent on Aug. 13, versus the AAA rating of 2.99 percent that day. A similar Detroit bond maturing in 2028 traded at a yield of 6.23 percent the same day.

The former Houston city controller, who is running for a third and final term as mayor this year, criticized the use of stop-and-frisk policing techniques in New York City, where she is supporting the mayoral candidacy of City Council Speaker Christine Quinn, a personal friend.

Parker said the tactic, in which police officers have stopped, questioned or frisked people they deemed suspicious, may violate the U.S. Constitution. U.S. District Judge Shira Scheindlin found Aug. 12 that the policy violates the rights of minority residents. The city is appealing the ruling. New York City Mayor Michael Bloomberg is founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.

“I would prefer to use other methods that have had an impact here in Houston,” where violent crime has declined to levels not seen since the 1970s, she said. “Clearly, I’m not the only one with constitutional issues.”

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