Detroit, the largest U.S. city whose debt is rated below investment grade, is warning investors of the risk of bankruptcy as it prepares to sell $250 million of bonds to help close its budget deficit.

The city told bondholders in a March 2 preliminary offering statement that while it hasn’t taken steps to reorganize under Chapter 9, it may have few other options if its financial condition gets worse. Detroit officials also detailed the steps they would have to take should bankruptcy became necessary.

“If the city’s financial status were to deteriorate further the city’s options to improve its fiscal health may be limited,” Detroit said in the statement. Bondholders “should not expect that their rights to payment and remedies will not be adversely affected by filing under the bankruptcy code.”

“We are still in a financial crisis but insolvency isn’t on the horizon or on the agenda at this time,” Mayor Dave Bing said in an e-mail from his spokesman, Dan Lijana.

Detroit plans to sell the bonds, backed by payments the city receives from the state, as soon as next week through investment banks led by Goldman Sachs Group. Proceeds will finance part of its operating deficit, according to a report from Moody’s Investors Service.

The city’s revenue has deteriorated due to job losses in the automotive industry and foreclosures tied to the recession.


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