LANSING – The credit ratings agency Moody’s called the city of Detroit’s decision to sue to invalidate a $1.45 billion certificates of participation pension swaps deal an “extreme act,” but also said it is such a rare move it would be unlikely to affect the broader municipal bond market.
If the city succeeds in federal court at repudiating the debt deal, it would be credit negative for holders of the city’s certificates of participation and “potentially for pensioners and other bondholders if the city were also required to return the proceeds of the certificate sale,” Moody’s said.
The city having to return proceeds is possible, Moody’s said, because since they funded the city’s previously unfunded pension liabilities and are part of the assets of the pension system, Moody’s said.
No municipality has successfully repudiated its debt since 1983 when a court ruled the Washington Public Power Supply System’s take-or-pay contracts were illegally executed, according to Moody’s.
Still, even if Detroit succeeds, the consequences should be confined to Detroit, Moody’s said.
“Ultimately, the city’s repudiation attempt is unlikely to impact the broader municipal market because it is so rare and the final outcome is likely to have limited implications for COPs holders elsewhere,” Moody’s said.
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