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Traders Get on Waiting List to Profit on Detroit's Bankruptcy

  +Follow July 29, 2013 1:04PM
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Once Detroit announced they would be going bankrupt, almost immediately traders began making their bet. The Detroit fallout involves almost $18 billion in debt, backed by insurance holders paying out to bondholders. Detroit is struggling to fund the city’s pension system (an expense that cannot be shuttered) and the city needs to sell bonds in order to do so. And as Detroit scrambles, Wall Street is payign attention, as hedge funds scramble to buy bonds, thus becoming creditors to the beleuagured American metropolis.

It’s a big bet, but many traders thinkdespite teh city's troubles they'll be able to meet their obligations. The rush to capitalize on the bankruptcy is so frenzied that there is currently a long waiting list to buy Detroit municipal bonds.  

The bond issue is further complicated by a refusal of the city to accept a bailout. Emergency city manager Kevyn Orr said “Hope is not a plan” and he has neither asked for nor been offered a bailout. But the desires of bond holders are of no interest to him, nor Governor Rick Snyder. Their only concern is “fixing Detroit.”

If the city defaults, the original bond-holers’ investments will become near worthless. Of special note are $530 million general-obligation bonds, backed by taxpayer money and thus considered safe - that is, if an entire city of taxpayers doesn’t default on them. Snyder brushed off concerns the scrambling bondholders could be left with nothing, noting that the Wall Street bond traders are “sophisticated buyers” who understand risk.

Regardless of risk, the bonds are the hottest bonds on the market right now. The bondholders who have gotten in on the trading believe Orr is being overly pessimistic on the city’s chances to meet their debt obligations.

Bullish investors think the payout will be far higher, citing the fact that cities usually pay back creditrors at a higher rate than corporate defaulters. According to municipal bankruptcy expert Jim Spiotto of Chapman and Chapman, while municipal bankruptcies usually pay out to bondholders better than corporate ones, Detroit could be a special case, because “Detroit has a long history of disappointing people.”If the city does end up paying off its debts though, the debt could be a huge win for bondholders. Orr originally put the return for bondholders at 10 cents on the dollar.

Detroit has agreed to sell 75 cents on the dollar for almost $340 million in secured debt to UBS AG ($UBS) and Bank of America Merrill Lynch (BAC) .

Among many austerity measures the city is considering undertaking to pay back creditors, Detroit has considered restructuring their Sewage and Waste Management system, deferring penrring pension payouts, and even selling the city’s art collection, valued at around $1 billion.

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Results for UBS
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4 Jul 15 02:00:10
'Pleaded,' 'subpoena,' and 'guilty' are 3 words now used to describe $UBS: http://t.co/nb7BSmhLkI
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3 Jul 15 08:34:07
.@UBS leads both @MerrillLynch and @MorganStanley by 30% in advisor loss so far this year. woah. http://t.co/bvvZtnfrfJ $UBS #broker #wma
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$UBS: UBS AG's “Outperform” Rating Reaffirmed at Mediobanca SpA (UBS): http://t.co/ijOIXylkik
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2 Jul 15 12:00:07
$UBS should try to work 'failed,' 'losses,' and 'convicted' into its next mission statement: http://t.co/uwUvgEIx7r
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2 Jul 15 11:45:11
UBS AG Reiterated Rating by Mediobanca SpA (Ranked 190th) to Outperform $UBS #UBS http://t.co/qknao0b5Um
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2 Jul 15 11:43:35
$UBS received a new alert. Find out why at http://t.co/nZwqRf3BRT #stocks #daytrading #trading #mkt #NYSE #NASDAQ #markets 310
MarketBeatCom
2 Jul 15 11:42:17
UBS AG's outperform rating reiterated at Mediobanca SpA. http://t.co/Nvk0mf7sNJ $UBS #UBS
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Mediobanca SpA Reaffirms “Outperform” Rating for UBS AG $UBS http://t.co/4VzvoJPKNB
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2 Jul 15 11:39:00
UBS AG's outperform rating reiterated at Mediobanca SpA. http://t.co/yC9Zccs6Mh $UBS #UBS
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2 Jul 15 11:35:57
Mediobanca SpA Reaffirms “Outperform” Rating for UBS AG $UBS http://t.co/j1ZOM4V7EJ
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2 Jul 15 07:30:01
$UBS:US There's still hope for Masters: UBS #UBS AG http://t.co/xaxF2GtYli #STOXX600
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$UBS: Wall Street analysts bullish on UBS's earnings growth: http://t.co/N3v1FcwMd7 http://t.co/jSd6pSlEYm
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2 Jul 15 02:00:09
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1 Jul 15 23:23:04
$UBS:US There's still hope for Masters: UBS #UBS AG http://t.co/RtUVhowvs6 #STOXX600
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Bear Of The Day: #EPAM $EPAM Also $UBS http://t.co/o7YTt7noEv
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1 Jul 15 17:00:07
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1 Jul 15 16:39:02
Bear Of The Day: #EPAM $EPAM Also $UBS http://t.co/Ncx289oSyB
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$UBS:US UBS: Property has peaked #UBS AG http://t.co/hFS4omE7FH #STOXX600
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1 Jul 15 12:00:07
It's not often you hear 'declined' and 'against', used to describe a bank, but when you do it's $UBS: http://t.co/MuTIQDYn0S
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1 Jul 15 10:03:54
Bear Of The Day: #EPAM $EPAM Also $UBS http://t.co/o7YTt7noEv
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1 Jul 15 09:28:31
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1 Jul 15 09:24:20
$UBS: UBS AG Receives $28.50 Consensus Target Price from Analysts ...: http://t.co/IzvwIhvE2h
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1 Jul 15 07:24:24
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1 Jul 15 06:05:04
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1 Jul 15 05:56:22
Thanks #Greece, we just “doing God’s work” $GS $MS $DB $CS $UBS $HSBC #Tsipras #Varoufakis http://t.co/vv2fXjewxk http://t.co/uF7fCnsD8D
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1 Jul 15 04:56:53
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30 Jun 15 23:20:20
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30 Jun 15 16:03:03
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DaPrOxX
30 Jun 15 15:04:48
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30 Jun 15 14:54:25
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30 Jun 15 14:52:56
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30 Jun 15 14:48:00
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30 Jun 15 07:00:06
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29 Jun 15 13:44:05
NEW SEC Filing for $UBS filed a moment ago: http://t.co/tueyuPxeqZ http://t.co/VnvIq1N2Go
				
				
  +Follow July 29, 2013 1:04PM
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