WASHINGTON (Reuters) - The bankruptcy filing by Detroit is a credit negative, Moody's Investors Service said on Thursday, because it creates uncertainty for bondholders, will likely interrupt payments on general obligation and limited tax bonds, and begins a process that may span years.
"While not unexpected, the filing opens the door to what will likely be an unprecedented litigation scenario," said the agency in a special comment. "Before issues like bondholder recovery levels and what level of services city residents will experience become clear, the bankruptcy is likely to be a complicated and protracted process."
Genevieve Nolan, a Moody's assistant vice president and analyst who helped author the special comment, said: "If we're taking a very, very long-term view this could be the point whether the city turns around, but at this time it is a credit negative.
"It's too early to tell what benefits - if any - come from this action."
In June, the city defaulted on a $39.7 million payment on taxable pension debt and presented a financial restructuring plan the rating agency called "unconventional."
At that point Moody's downgraded the rating of about $1.5 billion of certificates of participation to Ca, and then moved to cut Detroit's general obligation unlimited tax rating to Caa3.
The city is just at the beginning of a lengthy legal process, said fellow analyst Jeff Yorg. A judge will have to decide if Detroit can even file for bankruptcy, which includes proving the city tried to negotiate in good faith, and that alone could take months.
"It's based on previous history of other bankruptcies," he said, adding that "creditors will continue to challenge it."
The city's pension funds had already filed suit in court before Detroit filed for bankruptcy, he noted.
(In July 18 item, corrects paragraph 6 to say Moody's downgraded certificates of participation to "Ca", not "lowest level of D")
(Reporting by Lisa Lambert; additional reporting by Karen Pierog in Chicago; Editing by Tiziana Barghini and Mohammad Zargham)