We have been closely following developments for some time and our investment teams anticipated and prepared for the possibility of such a filing.
At this time, we do not expect developments involving the City of Detroit to have a significant effect on the performance of Fidelity’s funds or investment portfolios.
On March 25, 2013, the Governor of Michigan, Rick Snyder, appointed Kevyn Orr, a former bankruptcy lawyer, as the City of Detroit’s Emergency Manager. Mr. Orr was tasked with resolving Detroit’s financial problems.
On June 14, 2013, after weeks of evaluating the City’s finances, Mr. Orr issued a proposal seeking to negotiate a settlement with creditors. Unable to reach a settlement with creditors, the City formally filed for Chapter 9 bankruptcy protection on July 18, 2013.
Chapter 9 of the U.S. Bankruptcy Code governs all bankruptcy proceedings for municipalities such as Detroit. Since a municipality cannot be liquidated or reorganized, the primary purpose of Chapter 9 is to help a city or town seek protection from its creditors while it negotiates in good faith to provide a plan for adjusting its debts.
We will continue to closely follow developments as the bankruptcy proceedings move forward.
As of June 30, 2014:
Fidelity's mutual funds did not hold any general obligation (GO) bonds issued by the City of Detroit.
Some Fidelity municipal bond mutual funds held certain water and sewer securities issued by the City of Detroit. These securities are backed by water and sewer system revenues, which are different from the general revenues of the city of Detroit. Principal and interest payments on the water and sewer bonds are not expected to be changed by the bankruptcy filing. In addition, all of the Detroit water and sewer holdings in Fidelity mutual funds have the added security of a guaranty of payment by investment grade bond insurers.
As with all potential investments, we carefully analyze all of the bonds in which we invest from credit, structural and legal perspectives. Our evaluation involves balanced consideration of return potential and risk relative to current market pricing.
Detroit water and sewer facilities provide essential services for over 40% of Michigan residents. The vast majority of those customers live outside the city of Detroit. The revenues received by these Detroit water and sewer entities are expected to be sufficient to pay debt service on these bonds.
These same revenues are also considered to be special revenues under Chapter 9, which should provide protection and continued payment of the bonds throughout a bankruptcy proceeding.
The combination of these factors and others has led our investment staff to feel confident in the issuers’ ability to make continued debt service payments.
Fidelity Fund Holdings in Detroit Water and Sewer Bonds
|6/30/2014||Fidelity Municipal Income Fund||0.92%|
|6/30/2014||Fidelity Tax Free Bond Fund||0.49%|
|6/30/2014||Fidelity Municipal Income 2023 Fund||0.27%|
|6/30/2014||Fidelity Intermediate Municipal Income Fund||0.31%|
|6/30/2014||Fidelity Limited Term Municipal Income Fund||0.08%|
|6/30/2014||Fidelity Michigan Municipal Income Fund||10.37%|
Fidelity’s other fixed income portfolios, including investment grade taxable bond funds and money market mutual funds, did not have exposure to securities issued by the City of Detroit.