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Detroit defaults on more than $600 mln of 'unsecured' GO bonds

Oct 1 (Reuters) - Detroit on Tuesday defaulted on more than $600 million of general obligation bonds deemed unsecured by the city's emergency manager, a city spokesman said.

The move marked the second bond default by cash-strapped Detroit after Kevyn Orr, the former corporate bankruptcy attorney who has been running the city since March, announced on June 14 a moratorium on unsecured debt payments.

Bill Nowling, Orr's spokesman, confirmed the city did not make debt service payments due on Tuesday on the unsecured GO bonds, including $411 million of voter-approved unlimited tax debt. However, payments were made on about $349 million of GO bonds deemed secured debt by the city, he added.

"Unsecured debts will be satisfied in the course of a plan of adjustment or by mutual agreement of the parties, and approval of the judge," Nowling said, referring to Detroit's bankruptcy filing.

With the city sinking under more than $18 billion of debt and other obligations, Orr on July 18 filed what would be the biggest Chapter 9 municipal bankruptcy in U.S. history. Orr has said that about $11.9 billion of that debt was unsecured, lumping GO bond creditors in with the city's public pension funds and retiree health care.

The treatment particularly of voter-approved bonds is likely to be challenged in court unless mediation ordered by the court results in some kind of settlement.

Nowling did not supply the total amount of bond payments that were or were not made by the city. A spokeswoman for U.S. Bank, which receives and disperses payments for Detroit bond issues, declined to comment on Tuesday.

As trustee for Detroit bond issues, U.S. Bank, was expected to officially notify bondholders of a default. The trust services of U.S. Bank are based in St. Paul, Minn.

Nowling also declined to comment on what the city planned to do with revenue from property taxes specifically levied for the payment of the voter-approved GO bonds. Diverting the money to pay for city operations would violate the Michigan Constitution, according to state constitutional experts.

"This is a question which will be dealt with in a proposed plan of action, which will not be presented until after eligibility is determined," Nowling said.

U.S. Judge Stephen Rhodes is scheduled to hold hearings this month on objections to Detroit's legal right and eligibility to be in bankruptcy.

Bondholders of defaulted debt still will be paid as city documents indicate that most of the GO bonds were insured. Assured Guaranty; National Public Finance Guarantee Corp, the public finance subsidiary of MBIA Inc; Ambac Assurance Corp; and Syncora Guarantee have said they will make timely payments on the bonds they insured.

Ahead of the default, Fitch Ratings on Monday dropped Detroit's credit rating to the lowest level of D from C, affecting $613.8 million of limited and unlimited tax GO bonds.

In June, Detroit defaulted on $1.45 billion of pension debt that was also insured, although one of the insurers - Financial Guaranty Insurance Co - will be initially paying only 17 cents on the dollar for insurance claims, according to a Sept. 20 notice from U.S. Bank. Syncora, the other pension debt insurer, has made full payments.