As has been widely anticipated, the City of Detroit failed to make scheduled interest payments on general obligation (G.O.) bonds deemed unsecured by the city’s emergency manager on Tuesday. As a result, these bonds are currently in default status.
This development will most likely lead to rating agency downgrades of the city’s unlimited tax general obligation debt (ULTGO) and its limited tax obligation (LTGO) debt. The rating on Detroit’s Pension Obligation Certificates was downgraded to D by Fitch Ratings after those obligations missed $39.7 million of debt service payments in June.
This latest default was the result of a decision by Detroit’s Emergency Manager Kevyn Orr to treat ULTGO and LTGO debt, along with the city’s post-employment benefit obligations to retirees, as a single class of unsecured debt in bankruptcy. Rating agencies—and some market participants—fear that this treatment of municipal debt could undermine basic expectations of creditors during a debt workout.
The five Oppenheimer Rochester national municipal bond funds and Oppenheimer Rochester Michigan Municipal Fund all own Detroit G.O.s, and 100% of these bonds are insured by a variety of municipal bond insurers, including AGMC and FGIC. We fully expect that all insurers will fulfill their policy obligations to bondholders.
The Rochester funds also own Detroit Water and Sewer bonds. The city has more than $5 billion in these types of bonds outstanding, and Mr. Orr has already established a plan by which these bonds will be paid. Additionally, most of the Water and Sewer bonds owned by the funds are insured and not expected to experience any interruption in debt service payments.
All bond ratings referenced are supplied by a Nationally Recognized Statistical Rating Organization (which include such credit ratings agencies as Standard & Poor’s, Moody’s Investors Service and Fitch Ratings) and imply a level of financial strength relative to other similarly rated investments. Methodologies vary among these agencies, and the ratings used represent the agencies’ opinions as to the credit quality of issues that each agency rates. These ratings are neither endorsed by nor verified by OppenheimerFunds. Further information about each agency’s approach is summarized in the appendix to our funds’ Statements of Additional Information appendix to our funds’ Statements of Additional Information.
Fixed-income investing entails credit and interest rate risks (when interest rates rise, bond/fund prices generally fall). A portion of a municipal bond fund’s distributions may be subject to tax and may increase taxes for investors subject to federal alternative minimum tax; however, income distributions from Rochester’s two AMT-free funds will not increase an investor’s exposure to AMT. Capital gains distributions are taxable as capital gains.
Oppenheimer Rochester® municipal bond funds include below-investment-grade securities (“junk bonds”) that may be more at risk of default and subject to liquidity risk. Funds can maintain a relatively high portion of their portfolio holdings in particular segments of the municipal securities market, such as tobacco bonds or real-estate-related securities, that are prone to above-average price volatility. Funds may invest substantially in U.S. territories, commonwealths and possessions and could be exposed to their local economic and political conditions. State-specific muni bond funds may also invest in a limited number of issues within a single state, which can further increase volatility and exposure to regional developments. Fund holdings are subject to change.