Still, the public finance industry is watching Detroit's treatment of general obligation bonds in the bankruptcy process very closely. If Orr continues his campaign to subordinate them, and if that became an acceptable precedent, muni bond investors and insurers would be hit hard.
However, BTIG's Palmer believes Orr's restructuring plan was a romantic gesture that will be cast quickly aside in the bankruptcy process.
"If [subordinating general obligation bonds to unsecured status] were to become a precedent, then that would be a concern," he said. "Frankly, it appears to us that Kevyn Orr intended to put Detroit in bankruptcy from the get-go, and his proposal was not one that he expected would be enacted. Now, he has more flexibility to sell assets and take other actions."
In any case, Assured's future is not tied forever to Detroit's, whatever happens during the bankruptcy process."When a bond insurer does pay out, it's usually a very small fraction of the total amount," Palmer said, explaining that Assured likely wouldn't be on hook for all of its Detroit exposure. Furthermore, Palmer argues that, because the maturity dates on muni bonds are off in the distant future, "When you apply present value factor to that cash flow stream, the loss that Assured sustains can be relatively small." The present value factor is an equation that discounts future values based on the assumption that present money is worth more than future money. For instance, when Assured inherited some Greek general obligation debt through an acquisition, the losses weren't as bad as they sounded, Palmer said. "While the notional amount may have been large, the maturities were far out," he added. Assured expressed optimism about its municipal business in a May 23 investor presentation. "Out of approximately 11,000 direct U.S. public finance obligors, we expect future losses to be paid, net of recoveries, on less than a dozen. In 1Q-13 we made payments on only four," according to the presentation. In Detroit, Assured has exposure to $2.796 billion of the city's net par outstanding debt, an investor presentation said.
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