Beruflich Dokumente
Kultur Dokumente
7 August 2013
Detroit
Chapter 9 Begins
With Detroits Chapter 9 filing in late July, we look at the various liabilities involved in the bankruptcy, although it should be understood that this does not constitute legal advice. We begin with a discussion of the pension obligation certificates (POC), which we believe could be subject to the most volatility over the course of the bankruptcy process. The FGIC-insured POC 2025s, for example, traded down meaningfully in dollar price after the release of the EMs Proposal for Creditors (from $65 to $30-40). Absent an unforeseen development, we believe it is unlikely that the POCs will return to $60-70. We detail cases in which returns appear to be below 30 cents on the dollar. In our view, crucial determinants of recovery on the FGIC-insured POCs are recovery from the FGIC claim, recovery under the $2bn unsecured note, and subrogation rights on the note. As we believe that there is a high probability that FGIC may successfully argue for ownership of the $2bn note, returns to holders of FGIC-insured POCs are limited by the greater of the value of the FGIC claim and the value of the $2bn note. Setting aside outcomes adjudicated in court, we can also envision an instance in which FGIC-insured POC holders are offered a settlement. Should this come to fruition, investors are faced with the decision of either a short-term goal of certainty of payment or a long-term goal of maximizing returns. We also discuss the following classes of liabilities and their treatment in bankruptcy: Thomas Weyl +1 212 526 0751 thomas.weyl@barclays.com Sarah Xue +1 212 526 0790 sarah.xue@barclays.com Ming Zhang +1 212 528 7055 ming.zhang@barclays.com www.barclays.com
Water and Sewer: We believe that water and sewer bonds will likely retain special revenue
status in bankruptcy. Although the EM has proposed an exchange of the non-callable debt, which would result in market value impairment, we see impediments to its implementation. The AGM-insured water revenue 2033s offer value at current levels, with the YTW differential versus comparable indices near wides since January 2012.
State Aid Enhanced UTGO: Arguably the most secure of the four classes of GO debt, the state
aid-enhanced UTGOs appear to have statutory lien status via the revenue sharing enhancement. Additionally, if this were abrogated, the bonds could have special revenue status in bankruptcy.
Standalone UTGO: We believe these bonds could have special revenue status in bankruptcy.
Spreads on UTGO 2028s are trading 45bp off their YTD tights and 10bp away from the average.
State Aid Enhanced LTGO: The state aid enhanced LTGOs appear to have statutory lien status
via the revenue sharing enhancement. Should the lien on the bonds be abrogated, these bonds would likely become unsecured.
Standalone LTGO: These are arguably the weakest of the four types of GOs available, with low
likelihood of statutory lien or special revenue status. Additionally, as these appear to be more difficult to source and certain issues are uninsured, investors may wish to consider other types of debt.
POC Swaps: Risk factors regarding security for the POC swaps include potential invalidity of
the POCs themselves, risk that the swap security is not special revenue, and risk that the swap security (if judged to be a standard revenue bond transaction) is not properly perfected.
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 19
Overview
The first court hearing on the Detroit bankruptcy was held on July 24, 2013. Two specific topics were covered: the status of conflicting state court objections to the bankruptcy filing and the extension of immunity to related parties such as the emergency manager (EM) and the governor of Michigan. In both cases, US Bankruptcy Judge Rhodes provided preliminary victories for the city, granting an injunction against any related suits being heard in state courts and extending the immunity from suits as requested. This decision means that the city parties (the city itself, the EM and the governor) will not be distracted by the several suits filed or to be filed in State Court opposing the action. Judge Rhodes ruled that municipal unions and others seeking to litigate grievances against the proposed fiscal restructuring of the city must bring said grievances and litigation to the US bankruptcy court. This decision is consistent with general bankruptcy theory, which holds that the idea of bankruptcy is to provide a single forum to manage the many issues involved in a financial restructuring. Current and potential litigants will have at least two main opportunities to litigate their case: through the eligibility process and at plan confirmation. Initially, there will be some administrative or procedural hearings, with the first real issue to be determined being eligibility. The EM has requested that Judge Rhodes require objections to the filing (eligibility issues) to be filed within 30 days, which he has granted. This is fairly short period from what has occurred in other Chapter 9 bankruptcies. For example, the eligibility process took over nine months in the case of Stockton, California, and was fairly long and contentious in the Vallejo, California case. In Stockton, objections were filed several months after the commencement of bankruptcy. At an early August hearing, Judge Rhodes began to solicit comments regarding his proposed timetable, which has Detroit moving through bankruptcy court fairly quickly. Specifically, he has proposed that the trial over Detroits eligibility be set for late October; this is ahead of the EMs proposal for a November deadline with regard to filing pre-trial briefs. Although Judge Rhodes is attempting to move the case along quickly, expectations of many issues of first impression are likely to result in several lengthy appeals and could prevent a speedy bankruptcy (with a September 2014 emergence date, as proposed by the EM). The judge has set a mid-March 2014 deadline for the city to file its plan of adjustment. Overall, we expect a vigorous fight over eligibility. There are eligibility hearings in most contested Chapter 9 cases, as this is one of the few opportunities for creditors to force a trial and judicial ruling. Unions will likely bring state court arguments to be heard in US bankruptcy court, which may state that these arguments are issues to be determined at confirmation, rather than at an eligibility hearing. Bondholders, unions and other constituencies might object to eligibility on a good faith basis. 1 As in the Stockton bankruptcy, creditors may argue that the EM basically held forums for stating the case for his restructuring proposal and that there were little real negotiations (let alone good faith) in the conduct of the forums. The EM has claimed that his efforts to negotiate in good faith were interrupted by creditors filing for court injunctions against his plan. In recent cases such as Stockton and Vallejo, the distressed fiscal condition of the city trumped creditors arguments against eligibility.
Section 109(c)(2) of the bankruptcy code establishes the following requirements for a debtor to file for Chapter 9: the entity 1) must be a municipality as defined under state law; 2) has specific authorization to file; 3) is insolvent; 4) wants to adjust its debts through a plan; and 5) has obtained the agreement of majority of creditors in each class with regard to the impairment under the plan, has failed to obtain the agreement of said creditors but has negotiated in good faith, or fulfills some other conditions.
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3,474 5,718
Impaired? Impaired?
Note: UTGO stands for unlimited tax general obligation; LTGO stands for limited tax general obligation. 1) Designated as secured under the EMs plan, with distributable state aid enhancement. 2) Standalone without distributable aid enhancement. Designated as unsecured under the EMs plan. * The amount outstanding and enhanced amounts shown for Detroit Water & Sewer Bonds are as of June 30, 2012; all other amounts outstanding have been adjusted for issuance and principal payments through June 30, 2013. Source: City of Detroit June 14 Proposal for Creditors, Official Statements, Barclays Research
Figure 2 shows the spread movements in selected Detroit credits year-to-date. For the majority of this period, the unlimited tax general obligation (UTGO) bonds appear to have traded with a combination of credit concern and standard market movement. In June, spreads on the UTGO bonds widened with the announcement of the EMs restructuring FIGURE 2 UTGO (unenhanced) 2028s vs. LTGO (enhanced) 2035s and Water Revenue 2033s (bp), Spread above AAAs (bp)
250 200 150 100 50 Jan-13
Feb-13
Mar-13 Apr-13 May-13 Jun-13 Jul-13 UTGO (standalone, A3/AA-/C) 2028s LTGO (with distributable state aid, AA3/AA/NR) 2035s Water Revenue (AGM-insured, A2/AA-/BBB) 2033s
Aug-13
Note: LTGO 2035s are enhanced with distributable state aid. Source: Barclays Research
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Barclays | Detroit: Chapter 9 Begins proposal that claims that the UTGO bonds are unsecured obligations in a bankruptcy. In June, spreads on the water revenue bonds widened as well. Arguably, there would have been no widening in the latter if not for the proposed forced exchange into a weaker credit structure, as the EMs restructuring proposal treats this special revenue debt as unimpaired. The following sections explore each particular debt or liability line item in more detail. With the exception of the POCs and the POC swap contracts, the order of the following sections indicates our belief of the capital structure and relative rankings of the various liabilities in a bankruptcy.
POC Security
The POCs are unsecured. There has been some market discussion that perhaps there is a stronger legal pledge backing the POCs than the statement found on Page 7 of the 2005 Official Statement, which says, The citys obligation to make COP Service Payments are unsecured contractual obligations of the City, enforceable in the same manner as any other contractual obligation of the City. However, our analysis of the lien status does not seem to provide any additional argument that POC holders (or insurers) may use to attempt to enhance their claim.
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Barclays | Detroit: Chapter 9 Begins pool, there is the added benefit of potentially eliminating the POC swaps. This action could add roughly $50mn per year in excess cash flow available for unsecured creditors.
Relative Value
The dollar price on POCs (those insured by FGIC) declined sharply around the time of the EMs June 14 Proposal for Creditors. For example, just before the release of the proposal, the POC 2025s traded at $65; following its release, prices declined meaningfully, to $30-40 (Figure 4). We believe that these bonds will likely not return to the $60-70 context, in light of their relative ranking on the capital structure and payments designated under FGICs plan of rehabilitation. Floating rate Syncora POCs are not eligible for the Barclays Municipal Index or the Barclays High Yield Municipal Index. We also were unable to locate trades of any size pertaining to Syncora POCs in the past year. FIGURE 4 POC 2025s and 2035s, Dollar Price
$80 $70 $60 $50 $40 $30 $20 $10 $Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13
Source: 2005 and 2006 POC Official Statements, City of Detroit June 14 Proposal for Creditors, Bloomberg, Barclays Research
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Barclays | Detroit: Chapter 9 Begins The statement that the treatment is still being reviewed is intriguing in a similar manner to the comment regarding the validity of the POCs. In the Proposal for Creditors, it appears as if the EM is trying to create negotiating leverage with certain creditors, including the holders of POCs and the POC swap counterparties. In the process, he is also leaving a roadmap for other unsecured creditors in their attempt to increase returns by knocking out other claims.
Risk Factors
We see three basic risk factors regarding the security for the POC swaps:
Potential invalidity of the POCs themselves Risk that the security is not special revenue Risk that the security, if not special revenue, is not properly perfected Potential Infirmities Regarding the POC Swaps
In this case, there are potential infirmities regarding the POC swaps, including the validity of the POCs themselves and the lien status of the casino tax revenues pledged to the swap counterparties. If it is determined that the POCs were not validly issued, then it is possible that the swaps might be voided as an obligation. As far as lien status is concerned, it is possible that the proper lien status is not special revenue; if the lien is judged to be that of a standard revenue bond transaction, then there is a chance that the lien is not properly perfected. To evaluate the claim of special revenue status for the swaps, we consult the same reference material quoted in earlier sections, Municipalities in Distress. The definition of special revenues appears to support this argument. Definition (B) reads as follows: special excise taxes imposed on particular activities or transactions. The accompanying text expands this definition as follows: An excise tax on hotel and motel rooms or the sale of alcoholic beverages would be a special excise tax under Clause (B). Special Excise Taxes are taxes specifically identified and pledged in the bond financing documents and are not generally available to all creditors under state law. The case for special revenue treatment appears strong until the last phrase. Here, the casino taxes are generally available to all creditors, making it at least questionable whether the swaps are special revenue. If the swap security is deemed to be a standard revenue bond security, then the value of the pledge security will be substantially reduced. Special revenue bond treatment is thought to mean that the bondholders are fully secured because the lien is a replacement lien that continues in place until the bonds are paid in full. In contrast, the security for a standard revenue bond transaction in bankruptcy is valued as of the filing of the bankruptcy and may be at a level considerably less than par on the bonds. The revenue pledge essentially means that the value of the security equals the value of receivables at the time of the filing plus any cash on hand in a creditor-controlled bank account. In this case, there is a collateral or custody arrangement, in which daily casino tax receipts flow to the custody account in the control of the creditors. Thus, the value of the security will effectively be the amount of cash on hand in this account on the date of filing.
Actions Taken by EM and Swap Counterparties Indicate Differing Views on Whether the POC Swaps Should Be Treated as Special Revenue
Days before filing for Chapter 9, the city entered into a settlement with its swap counterparties. Under this, the city may choose to terminate the swaps and pay 75% of the value of the swap termination payment through October 31, 2013; 77% between November 1 and November 15; and 82% between November 16, 2013, and March 13, 2014. We find this settlement (and developments leading up to it) revealing. While fighting the special revenue argument with the UTGO, the EM appears to have conceded the special 7 August 2013 6
Barclays | Detroit: Chapter 9 Begins revenue argument to the swap counterparties by offering them at least 75 cents on the dollar. We believe there are several actions taken by the swap counterparties that actually indicate a lack of comfort with the strength of the special revenue argument. The first is the specific treatment of the revenue under that 2009 transaction, based on the July 2013 Forbearance Agreement; the second is the fact that a supposedly fully secured creditor group would choose to enter into a settlement agreement with the EM that could lead to a loss of up to 25% of potential claims. The swap counterparties indicated a level of concern about this special revenue bond treatment when they structured the enhancement in 2009. The documents recently filed with the bankruptcy court to approve the new forbearance agreement do not claim special revenue bond status. Instead, the 2009 enhancement indicates a standard commercial security transaction. There is a material difference in value of the security between special revenue and standard revenue bond treatment. Special revenue bond treatment means payment in full, as the automatic stay is not in force and the creditor lien continues. In a standard commercial revenue transaction, the value of the security is determined at the time of filing. The difference here is very large, as the secured position as of the date of filing is potentially as low as $14mn, versus a swap termination fee of $296.5mn and a notional amount of $800mn.
Barclays | Detroit: Chapter 9 Begins to a pension/OPEB recipient. This $1bn placeholder for pension claim is considerably closer to the true unfunded pension liability, which is estimated to be in the range of $900mn-$1bn. The $1bn in OPEB claim represents our estimate of the unfunded liability arising from the proposed change in insurance. Finally, claims pool 3 removes the OPEB claim altogether, because of double-dip issues previously discussed in A Chapter 9 in the Making? Most Frequently Asked Questions (July 2013). FIGURE 6 Unsecured Claims Pool Hypothetical Scenarios
Amounts in $mn UTGO LTGO POC Principal Pension OPEB Other Claims Pool 1 0.0 161.0 1,428.8 3,474.0 5,718.3 298.2 11,080.3 Claims Pool 2 0.0 161.0 1,428.8 1,000.0 1,000.0 298.2 3,888.0 Claims Pool 3 0.0 161.0 1,428.8 1,000.0 0.0 298.2 2,888.0
Recall that the EM proposes to provide a $2bn note to unsecured creditors. We now explore the sensitivity of returns for that $2bn note should UTGO debt receive secured special revenue treatment. Figure 7 builds on Figure 6 and shows a range of potential returns (in PV terms) on that $2bn note as a percentage of the hypothetical unsecured claims pools 1-3. Case A of Figure 7 shows the present value of the note assuming that it is paid down according to the EMs formula, without blight grants or asset sale adjustments. Case B shows the present value of the note assuming pay-down according to the EMs formula, with blight grants and asset sale adjustments built in. Case C shows a cash flow sweep scenario, including blight grants and asset sale adjustments. We use a 10% discount rate in discounting projected cash flows. FIGURE 7 Sensitivity of Returns on $2bn Note using Different Assumptions and Claims Pool Sizes
Claims Pool PV on $2bn Note: Case A Case B Case C
Source: Barclays Research
Claims Pool 1 2% 5% 8%
Using these assumptions, we arrive at returns of 2-29 cents on the dollar on the $2bn note as a percentage of claims. In claims pool 1 and case A, returns are minimal because we follow the EMs restrictive pay-down formula and assume no asset sales or blight grants; the unsecured claims pool remains similar to the EMs proposal, though UTGO creditors are treated as secured. In claims pool 3 and case C, the 29 cent PV assumes that unsecured creditors are able to negotiate a cash flow sweep for the claim and the size of the pension claim is significantly reduced, while OPEB claims are eliminated altogether. We caveat that these scenarios are not meant to forecast actual recoveries on the $2bn note. Instead, we intend to provide a sense of how:
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A negotiated change in the payment methodology on the $2bn note also improves
returns, with a cash flow sweep particularly beneficial to noteholders. We emphasize that any return above that shown in Case A/Claims Pool 1 is highly dependent on unsecured claimants securing litigation and negotiation victories; these results are highly uncertain.
* The amount outstanding and enhanced amounts shown for Detroit Water & Sewer Bonds are as of June 30, 2012; all other amounts outstanding have been adjusted for issuance and principal payments through June 30, 2013. Source: City of Detroit June 14 Proposal for Creditors, Official Statements, Barclays Research
Per the EMs classification of debt as secured or unsecured, there is roughly $630mn of GO debt at risk as unsecured. Of this amount, only $68mn is not insured and, therefore, truly at risk. However, when we drill down in the insured categories, we find $34mn in UTGO insured by Syncora. We expect current payments to be made by Syncora, but questions regarding full coverage remain.
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Barclays | Detroit: Chapter 9 Begins A significant area of concern is the POCs, as 100% of these are insured by FGIC and Syncora, with FGIC responsible for $1.1bn, or roughly 75%. We focus on FGIC because its payment status is relatively certain, given its rehabilitation plan.
Note: Recoveries shown are our approximations only. Source: FGIC Plan of Rehabilitation, Barclays Research
There are several key questions that holders of FGIC-insured POCs may wish to consider:
What are the potential legal outcomes, and how do they affect recovery for holders of FGIC-insured POCs?
Figure 10 shows four basic potential legal outcomes to holders of FGIC-insured POCs. In Outcome 1, they are deemed invalid and receive no return, as FGIC also deems the claim invalid. In Outcomes 2a and 2b, holders receive recovery from FGIC, and FGIC retains the pro rata share of recovery on the $2bn note, as the insurer successfully argues for subrogation rights to recoveries. In Outcome 2a, recovery from the FGIC claim exceeds recovery from the $2bn note; bondholder recovery is equal to the value of the FGIC claim. In Outcome 2b, recovery on the $2bn note exceeds recovery from the FGIC claim; bondholder recovery is equal to the value of the note itself, as the FGIC Plan of Rehabilitation states that any recovery above that which FGIC pays out will be paid back to bondholders. Finally, in Outcome 3, holders of POCs receive recovery from the FGIC claim and retain their pro rata share of the $2bn note, as the judge rules that FGIC does not to have subrogation rights to own the note.
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Barclays | Detroit: Chapter 9 Begins FIGURE 10 Potential Outcomes to FGIC-insured POC holders
(1) Nullification Ownership of $2bn note is immaterial Return = 0% (2a) FGIC Gets the Note Value of FGIC claim > Value of $2bn note. PV return of 15-22% of claims based on FGIC's projection in its rehabilitation plan. FGIC will likely argue that the unsecured claim return is its property. (2b) FGIC Gets the Note Value of FGIC claim < Value of $2bn note. Return: Current estimate of 2-29% of claims as shown in Figure 8. We believe this may be enhanced (i.e., by continuing the water & sewer fund pro rata share payments). (3) FGIC + Note Ownership of $2bn goes to bondholders. Return comes from FGIC claim and $2bn note, minus the return on the note that is owed to FGIC, as indicated by the Plan of Rehab. This result is achieved if the unsecured claim return is the property of current bondholders.
Source: FGIC Plan of Rehabilitation, City of Detroit Proposal for Creditors, Barclays Research
In our view, outcomes 2a and 2b are higher probability, while outcomes 1 and 3 are lower probability. FGIC would receive its pro rata share of the $2bn note if the outcome in the Las Vegas Monorail case (discussed below) repeats here and based on the subrogation rights contained in the FGIC Plan of Rehabilitation. These outcomes would occur if there is not a settlement.
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Barclays | Detroit: Chapter 9 Begins FIGURE 11 Summary of Recoveries in the Ambac-insured Monorail Case
Non-settling Bondholder Ambac Rehab Current Claim Payments Deferred Recovery on Underlying Obligation Valuation Current Status 25% 75% 0% 40-60 cents NPV initially Settling Bondholder Monorail Commutation 22 - 24% 0% 3% gross 24-26% NPV
Valuation trending higher as commutations are done at Valuation of monorail trailing lower as payments levels that are additive to Ambac. Surplus Notes, from the monorail are being made through issuance representing deferred claim against Ambac, are currently of additional notes quoted at 92 - 93 .
Note: As of June 30, 2012, and not adjusted for issuance/pay-downs thereafter. Source: City of Detroit June 14 Proposal for Creditors, Bloomberg, Barclays Research
Interest Rate
Maturity Date
Note: As of June 30, 2012 and not adjusted for issuance/pay-downs thereafter. Source: City of Detroit June 14
Description
The debt issues for the water and sewer systems have initially been described as secured special revenue debt of the utility systems by the EM and are expected to be unimpaired in terms of principal repayment. This treatment is consistent with market expectations over legal status of the lien of this debt. However, the city has not as yet published its formal
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Barclays | Detroit: Chapter 9 Begins bankruptcy restructuring plan; thus, our analysis is based on the Proposal for Creditors issued pre-bankruptcy negotiations.
Relative Value
The underlying ratings on the Detroit water and sewer bonds came under pressure this year, reflecting the risk of a potential forced exchange into a weaker credit structure. On June 17, Moodys downgraded the water and sewer systems senior lien rating to B1 from Ba1 and the second lien rating to B2 from Ba2. On July 19, S&P placed its BB- ratings on the issuer on CreditWatch negative. In terms of relative value, yields on this debt look attractive at current levels, compared with the Municipal Index and the HY Muni Index. The AGMinsured 2033s, for example, trade with a dollar price of $91 and YTW of more than 5.75%, with the yield differential between the CUSIP and broader muni indices near its wides since January 2012 (Figure 14). Since the water and sewer bonds could retain special revenue status in bankruptcy and the EMs proposed debt exchange faces obstacles, we believe that current yield levels more than adequately compensate investors, given the level of risk. FIGURE 14 YTW Differential between Water Revenue 2033s and Muni Index/Muni HY Index
bp 400 300 200 100 0 -100 -200 -300 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Water Revenue (AGM-insured, A2/AA-/BBB) minus Muni Index YTW Dollar Price Water Revenue (AGM-insured, A2/AA-/BBB) minus HY Muni Index YTW 108 Water Revenue (AGM-insured, A2/AA-/BBB) Dollar Price 106 104 102 100 98 96 94 92 90
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UTGO bonds
We separated the UTGO bonds into two groups based on security: UTGO bonds enhanced with the distributable state aid and standalone UTGO debt (Figure 15). FIGURE 15 UTGO Debt Breakdown
Insurer With Distributable State Aid Enhancement NA Without Distributable State Aid Enhancement Ambac Assured MBIA Syncora 78 169 88 34 469
Source: UTGO Official Statements, City of Detroit June 14 Proposal for Creditors, Bloomberg, Barclays Research
Interest Rate
Maturity Date
100
5.129 - 8.369
11/1/14-35
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Barclays | Detroit: Chapter 9 Begins acceptable to S&P. As a result, the notes were sold as unrated obligations at a much higher yield. Long-term investors purchased the high yielding notes on the legal analysis that the intercept may not provide timely payment during a bankruptcy, but the notes would eventually be repaid in full through the intercept. In subsequent issuances, the Detroit Public Schools provided an unenforceable covenant prohibiting the filing of bankruptcy in lieu of the bankruptcy opinion, and S&P restored its short-term rating.
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Barclays | Detroit: Chapter 9 Begins the UTGO holders would likely result in an appeal. Conversely, we believe that a ruling in favor of UTGO secured status may limit appeals. Since a swift completion of this bankruptcy is in the best interest of Detroit, the city has the incentive to settle arguments such as this lien status. If lien status goes to trial and one believes that the judge was likely to rule in the interests of Detroit, then the likely ruling is for the UTGO lien status rather than against.
Relative Value
Investors with the appropriate risk appetite may wish to consider standalone UTGO bonds. As discussed above, such debt will likely have a strong argument for special revenue status in bankruptcy, though there is no guarantee such argument will prevail. Additionally, it is cushioned by an added layer of protection via bond insurance (non-FGIC). Figure 16 shows spreads on the standalone UTGO 2028s, which are trading 45bp off their year-to-date tights and 10bp away from the average. FIGURE 16 Unlimited Tax GO (Standalone) 2028s, Spread above AAAs (bp) and Dollar Price
Spread (bp) 250 240 230 220 210 200 190 180 170 160 150 Jan-13
Source: Barclays Research
Dollar Price 104 102 100 98 96 94 92 90 88 86 Mar-13 May-13 Jul-13 $ price UTGO (standalone, A3/AA-/C, insured by Assured) 2028 Spd
Interest Rate
Maturity Date
379
3.00 - 5.25
11/1/14-35
4/1/14-25 4/1/14-16
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Relative Value
State aid-enhanced LTGO 2035s currently trade with a spread of 120bp (Figure 18); spreads widened shortly after the EMs proposal was filed, before tightening back to levels at the beginning of 2013. Investors looking for exposure to standalone LTGOs may wish to select CUSIPs that are insured, as two series are not enhanced by insurers. Standalone LTGO bonds tend to be of shorter maturities or smaller size; thus, it may be more difficult to find them. FIGURE 18 LTGO (Distributable State Aid) 2035s, Spread above AAAs (bp)
190 180 170 160 150 140 130 120 110 100 90 Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
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Appendix
Figure 19 provides a breakdown of which states allow its governmental entities to file for Chapter 9. FIGURE 19 State Authorization for its Governmental Entities to File for Chapter 9
States Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Bankruptcy Authorization Yes (bonds only) No Yes Yes Conditional Limited Conditional No No Conditional No No Yes Limited No No, with exception No Conditional Conditional No No No Conditional Yes No Yes States Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Bankruptcy Authorization Yes Yes No No Conditional No Conditional Conditional No Conditional Yes Limited Conditional No Conditional Yes No No Yes No No No Yes No No No
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Analyst Certification We, Thomas Weyl, Sarah Xue and Ming Zhang, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures: Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barclays.com or call 212-526-1072. Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays may have a conflict of interest that could affect the objectivity of this report. Barclays Capital Inc. and/or one of its affiliates regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). Barclays trading desks may have either a long and / or short position in such securities, other financial instruments and / or derivatives, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, Barclays fixed income research analysts regularly interact with its trading desk personnel regarding current market conditions and prices. Barclays fixed income research analysts receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income, Currencies and Commodities Division and the potential interest of the firms investing clients in research with respect to the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays produces various types of research including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research may differ from recommendations contained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise. Unless otherwise indicated, Barclays trade ideas are provided as of the date of this report and are subject to change without notice due to changes in prices. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html.
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