June 17 (Reuters) - Detroit's default and debt restructuring plan are precedent-setting in the U.S. municipal market, Moody's Investors Service said on Monday, because the city is looking to bondholders, as well as labor unions and pensioners, to share the pain.
The city on Friday defaulted on a $39.7 million payment on certificates of participation and presented a plan to restructure its finances.
"The restructuring plan is unconventional and precedent-setting in the municipal market. It builds a strong case for insolvency, girding the city for a tough fight with creditors of all types," Moody's said in a statement.
The default on the taxable pension debt Detroit sold in 2005 and 2006 led Fitch Ratings on Monday to downgrade the rating of about $1.5 billion of COPs to the lowest level of D from C.
Moody's also on Monday downgraded several Detroit bond issues, including a cut in the city's general obligation unlimited tax rating to Caa3 from Caa2 and reductions of its general obligation limited tax and certificates of participation (COPs) ratings to Ca from Caa3.
The proposal by Emergency Manager Kevyn Orr calls for unsecured creditors to take a pro rata share of $2 billion of new limited recourse participation notes, which would be issued to replace approximately $11 billion of unsecured obligations.
"The substantial reduction offered to unsecured creditors, the extent of the city's financial stress and the complexity of the city's debt add to the uncertainty of many classes of debt ultimately recovering their investment," Moody's said.
On Thursday, before the city's announcement, Moody's downgraded several classes of Detroit debt to Caa2 with a negative outlook.
Much of Detroit's debt is insured. Syncora Holdings on Monday said that its wholly owned unit Syncora Capital Assurance Inc received notice of the default and confirmed its pledge to pay bondholders according to contractual terms.
The company's fourth quarter 2012 operating supplement showed $329 million of outstanding Detroit pension debt insured by Syncora Capital Assurance Inc.
On Friday two of the insurers, National Public Finance Guarantee Corp, a unit of MBIA, and Assured Guaranty Ltd , had already confirmed that bondholders will be reimbursed.
Moody's also said the plan is unusual as it proposes similar treatment of various debt security types.
It noted that Orr did not propose a plan for creditors who are considered secured, such as the debt of the city's water and sewer enterprises or the city's general obligation debt, which is enhanced by state aid and claims relative to interest rate swaps. However, the latter are subject to negotiations.
"The plan appears to treat the general obligation and pension obligation certificates similarly, which would be a break from tradition," Moody's said.
Standard & Poor's Ratings Services, which on Friday downgraded the city to CC from CCC minus, kept a negative outlook on the lower rating due to the potential Detroit could file for bankruptcy.