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.