Detroit assumed its place in US history as the largest-ever municipal bankruptcy. Despite its size (Detroit estimates its liabilities at $18 billion) and the infamy of the event, the broad municipal market impact is expected to be negligible.

Sooner Than Expected, But Not Unexpected

Detroit’s Chapter 9 filing on July 18, although sooner than expected, was in no way a surprise to the market. The filing came one month after emergency manager Kevyn Orr’s June proposal to pay creditors pennies on the dollar in settlement of debt totaling $11.5 billion. Many viewed Mr. Orr’s plan as a prelude to bankruptcy from the outset. For more detail, see our recent thoughts on this subject in “Distress in Detroit.”

The proposal met with tough opposition from creditors (we had our own say on this matter) and legal action from pensioners also facing severe haircuts. In fact, a motion filed in state court the same day by a pension fund seeking a temporary restraining order to prevent the filing appears to be the catalyst for the sooner-than-expected event.

What Happens Next?

The city now has to convince a bankruptcy court that it is insolvent and eligible for Chapter 9 protection. Creditors will likely argue the city is not insolvent, pointing to current cash flow and assets owned (which are potential candidates for liquidation).

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