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Business leaders paint bankruptcy as step toward stronger Detroit; investors not so sure

From Detroit Free Press

By John Gallagher

July 19, 2013

Local business leaders Friday portrayed Detroit’s bankruptcy as a painful but necessary, and ultimately positive, step toward positioning the city for new growth.

Wall Street investors weren’t so optimistic. Analysts from the municipal bond market voiced fears that Detroit’s defaulting on its debts may make it harder for other municipalities in Michigan to borrow what they need.

Larry Alexander, president and CEO of the Detroit Metro Convention & Visitors Bureau, said Friday he’s been getting “quite a few” calls from worried meeting planners who wonder whether their upcoming conventions in Detroit will be impacted by the city’s troubles. Alexander said he assured them that won’t happen, and so far, nobody’s canceled.

The range of business reactions to emergency manager Kevyn Orr’s bankruptcy filing illustrates the complexity of what lies ahead. Local business leaders who have hoped and prayed for a stable city government for years were relieved the process was under way.

“We need to fix the fundamental problem,” Sandy Baruah, president and CEO of the Detroit Regional Chamber, said Friday at chamber headquarters in downtown Detroit.

But investors fretted over the uncertainties raised by Detroit’s Chapter 9 municipal bankruptcy, including the strong prospect holders of Detroit’s municipal bonds might see only a fraction of what they have paid.

The Bond Buyer, a Wall Street journal, told readers Friday that “the implications for the muni market appear potentially ominous.”

“This is the first time the largest city in a state has filed for Chapter 9 bankruptcy,” Ira Hammerman, senior managing director and general counsel at the Securities Industry and Financial Markets Association, told the Bond Buyer. “We are concerned that this development could raise borrowing costs for Detroit and other municipalities in Michigan over a long period because investors could perceive Michigan local government bonds as considerably less secure going forward.”

Municipal bond prices already seem to be weakening a little, said Matt Fabian, managing director of the Municipal Market Advisors, a Connecticut-based research firm.

“So far it’s inconsistent, but clearly prices are weaker, Detroit having a bigger effect on levels than anticipated,” he said in an e-mail to the Free Press. The impact so far is still small, and the municipal bond market was weaker anyway due to general economic conditions. But Fabian added, “The Detroit situation — and the extremely heavy media coverage — isn’t helping matters.”

Meanwhile, Peter Hayes, who heads the investment firm BlackRock’s Municipal Bonds Group, which oversees $114 billion in municipal bond assets, cautioned that the bankruptcy negotiations in Detroit “are likely to be long and complex, offering no resolution or clarity perhaps for years. Ultimately, it’s important for market participants to understand that Detroit is the exception and not the rule. This is first and foremost a Michigan issue, not a systemic municipal market issue.”

Hoping to insulate the Detroit business climate from the city’s fiscal troubles, Alexander said business leaders were describing the bankruptcy as the “solution (that) is going to help us move forward for the future.”

“The fact that we’ve come to this point I think we’re all very unhappy with,” Alexander said, “but we don’t have any other options and it’s going to help this city become stronger, move forward, provide more services and betters services to our residents and visitors.”

That echoed a statement issued late Thursday by Quicken Loans founder and Chairman Dan Gilbert, whose recent moves in downtown Detroit have brought thousands of new employees to the city.

Gilbert’s statement read: “Bankruptcy will be painful for many individuals and organizations but together we will get through it and come out stronger on the other side. We simply do not have a choice.”