Mon Mar 4, 2013 4:04pm EST
March 4 (Reuters) - The city of Detroit would have a potential path to bankruptcy court under a state-appointed emergency financial manager, posing risks to the city's bondholders, Moody's Investors Service said on Monday.
The credit ratings agency, which rates the city of Detroit Caa1 with a negative outlook, said the appointment of a manager under a current Michigan law or a new law that takes effect later this month "would be one procedural step closer to a bankruptcy filing" that could lead to delayed or reduced payments to bondholders.
The manager could ultimately recommend a Chapter 9 municipal bankruptcy would be the best remedy for Detroit. A bankruptcy filing by Detroit, which could be blocked by Michigan officials, would be the largest ever in the United States.
Michigan Governor Rick Snyder on Friday officially declared a financial emergency for his state's biggest city and said he has identified a top candidate for the manager job. Detroit officials have until March 11 to request a hearing to challenge the determination of an emergency.
Moody's also pointed out that the appointment of a manager would be an additional termination trigger for interest rate swap agreements associated with pension debt the city sold in 2006.
The swaps, which could cost Detroit as much as $440 million or about 22 percent of its operating budget, were previously subject to termination in March 2012, when Moody's dropped the city's rating to B2.
"The additional event could result in a termination and unbudgeted liquidity demand on the city," Moody's said in a report. "To date, counterparties have not requested a termination payment and the city continues to make its swap payments, which are supported by an intercept of the city's share of casino revenue distributions from the state."
The rating agency said an emergency manager appointment could be positive for the cash-strapped city by alleviating political and operational challenges that have stood in the way of efforts to solve big financial problems.
"The (emergency manager's) ability to amend the current year budget, which is now projected to end with a $113 million operating deficit, could be a first step toward imposing fiscal stability and improving the city's illiquid cash position," Moody's said.
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