Since Detroit filed for Chapter 9 bankruptcy protection on July 18, the city has become a muni bond testing ground on two fronts:

  1. The standing of general obligation bondholder claims under Chapter 9; and
  2. How well municipal bond insurers handle their biggest claims to date.

The City's Emergency Manager Kevyn Orr has indicated that he will treat Detroit's GO bonds as unsecured, and muni insurers Ambac Asurance Corp., which is on the hook for some of those bonds, has threatened a legal challenge. Representatives of the city's pension recipients already are aligned on Orr's side. The Wall Street Journal's MoneyBeat blog summarized the competing claims

According to Moody's, Ambac has insured $170 million in Detroit GOs – both limited and unlimited tax. A larger potential exposure is faced by Assured Guaranty Ltd., which Moody's says could lose up to $500 million in a worst-case scenario. However, Assured and MBIA have their heaviest exposures to the city's secured water and sewer bonds, which could yet be refinanced and result in limited insurer losses. Christian Herzeca, an attorney/blogger, wrote an interesting analysis of the insurers' bargaining position.

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