1. TIME TO SEE WHETHER DETROIT'S BIG BET ON SHEDDING ITS DEBT PAYS OFF By Stephen Henderson February 10, 2014 Detroit Free Press Presented by Kevin Spezia

2. Detroit’s Debt Problem Detroit is the nation’s first major city to declare bankruptcy Has $18.5 billion in debt and other liabilities $9.3 billion in debt; $9.5 billion in pensions [4] $7 billion of secured debt [4] Currently spends 38% of revenue on debt [4] Will submit restructuring plan in bankruptcy court on Wednesday [1]

4. Secured vs. Unsecured Debt Secured debt is backed by borrowers’ assets For cities, this may include future tax revenues If the borrower defaults, these assets are forfeit Because of its lower risk profile, secured debt has lower interest rates

5. Debt Restructuring Detroit will ask to discharge much of its debt, including some secured debt More money to focus on city services No problem for unsecured debt; can be easily discharged in bankruptcy Secured debt usually cannot be discharged in bankruptcy If it can, this may set a precedent that leads to far more difficult municipal bond markets

6. Risk Pricing (CAPM) Risk decreases profitability in lending; an increase in risk can be thought of as similar to an increase in supplier prices. Image [3]

7. Sources 1. Detroit Free Press. Bomey, Nathan. “Detroit expected to file bankruptcy restructuring plan next week”. February 10, 2014. http://www.freep.com/article/20140210/NEWS01/302100084/. http://www.freep.com/article/20140210/NEWS01/302100084/ 2. Detroit Free Press. Henderson, Stephen. “Time to see whether Detroit's big bet on shedding its debt pays off”. February 16, 2014. http://www.freep.com/article/20140216/COL33/302160039/Detroit- bankrutpcy-Kevyn-Orr-bankruptcy-plan-bondholders-debt-banks. http://www.freep.com/article/20140216/COL33/302160039/Detroit- bankrutpcy-Kevyn-Orr-bankruptcy-plan-bondholders-debt-banks 3. Econport.org. “Shifts Shown Graphically”. © 2006, Experimental Economics Center. http://www.econport.org/content/handbook/Equilibrium/shifts- graph.html. http://www.econport.org/content/handbook/Equilibrium/shifts- graph.html 4. The Huffington Post. Woods, Ashley. “A Guide To Detroit's Chapter 9 Default And How Bankruptcy Could Change The City”. July 24, 2013. http://www.huffingtonpost.com/2013/07/24/detroit- bankruptcy-chapter-9_n_3640734.html.http://www.huffingtonpost.com/2013/07/24/detroit- bankruptcy-chapter-9_n_3640734.html