Depfa Bank PLC, Dexia SA and a unit of Commerzbank AG have hired lawyers to protect their stake rather than immediately selling the debt—primarily bonds issued to help fund the city’s pensions. The move is unusual for banks, which typically don’t want to be mired in long bankruptcy-court fights, and it has frustrated a number of hedge funds that want to buy some of Detroit’s most battered bonds from the banks at deeply discounted prices.
Investors interested in distressed debt have figured out that blue cities, not just failing corporations, are ripe for the picking:
Since the 2008 financial crisis, there has been an average of 4.6 municipal defaults per year, up from an average of 1.3 defaults annually from 1970 to 2007, according to Moody’s. The average 10-year cumulative default rate still remains low at 0.12% compared with 11.8% for corporate borrowers.
The vultures are circling.[Detroit image courtesy of Shutterstock]