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Bond fallout from Detroit bankruptcy limited so far

A woman crosses the street in downtown Detroit on July 19, 2013 in Detroit, Mich.

When Detroit went bankrupt last month, it told its municipal bondholders to get in line with the rest of its creditors to be repaid. Municipal bonds -- often called “muni bonds” -- are considered some of the safest investments, but Detroit’s tack has led to a ripple effect in the $3.7 trillion municipal market.

Battle Creek, Mich., is 120 miles from Detroit. And it’s right on a train line, says the city’s finance director, Linda Morrison.

“There is a lot of noise, there’s a lot of trains that come through on a daily basis,” she says.

Because of the noise, Battle Creek wanted to sell $16 million worth of muni bonds. It planned to use the money to pay for a quiet zone downtown, to improve its arena and to buy a new fire engine, among other projects .

But even though Battle Creek has a good credit rating, some investors are wary about buying bonds in Michigan. Some have called it the Detroit penalty. Battle Creek called off its bond sale because investors wanted more interest than the city could afford to pay.

About $200,000 more a year,” Morrison says. “And some of these projects were going to be paid off over a five-year period, a 10-year period and some over a 20-year period.”

Lisa Washburn is a managing director with Municipal Market Advisors. She says while postponements happen from time to time, Battle Creek’s is the third in Michigan since Detroit declared bankruptcy.

“It is a bit unusual to have three transactions, so close together, in the state of Michigan, all pulled around the same time,” she says.

For now, though, the trouble seems contained to Michigan. That’s because Detroit’s proposal to treat bondholders just like everyone else it owes money is so unusual.

Alan Schankel, who analyzes muni bonds for Janney Capital Markets, says since the beginning of June, he has noticed municipal yields go up relative to treasury yields. (Yields go up when bond prices fall.) Still, he says, it’s not a big problem for municipal market. Recent sales in Connecticut and Washington have gone fine.

Last week, I believe approximately $7 billion worth of bond sales went off, pretty much without a hitch,” he says.

Schankel says, at the end of the day, there’s still a market for munis. The question, in Michigan, is at what price.

About the author

Kate Davidson is a regular contributor to Marketplace.

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