%1

Several hedge funds are betting they can profit from Detroit’s bankruptcy, snapping up more than $750 million of the city’s distressed debt, the Detroit Free Press reported today. Panning Capital Management bought $219 million, Aurelius Capital Management picked up $194 million, Bronze Gable got $158 million, Monarch Alternative Capital purchased $147 million and Stone Lion Capital Partners acquired $32 million. Those transactions represent about half of a disastrous deal orchestrated by former Mayor Kwame Kilpatrick’s administration in 2005 to fund Detroit pensions. The deal backfired and helped drive Detroit into bankruptcy because the city gambled that interest rates would rise. Instead they fell to historic lows in the wake of the 2008-2009 financial crisis. Detroit Emergency Manager Kevyn Orr’s team of Jones Day bankruptcy lawyers have called the deal illegal and argued it should be wiped out entirely. But the bond insurers who backed the deal — Syncora and Financial Guaranty Insurance Co. — have fought the city’s plan because they stand to lose hundreds of millions.

A U.S. District Court judge on Friday ruled that bond insurer Syncora Guarantee Inc. cannot block bankrupt Detroit's access to casino tax revenue, Reuters reported on Friday. Syncora, which insures some of the city's bonds and interest-rate swaps, appealed an Aug. 28, 2013 ruling by U.S. Bankruptcy Judge Steven Rhodes that gave Detroit access to about $11 million in monthly tax revenue that the insurance company had tried to block. U.S. District Judge Bernard Friedman said that Judge Rhodes had correctly decided that the disputed money was part of the bankruptcy estate. Syncora's attorney, James H.M. Sprayregen at law firm Kirkland & Ellis LLP, said that an appeal will be filed with the U.S. Sixth Circuit Court of Appeals. The company claims it has a lien on the money, which had been used as collateral since 2009 to secure the swap agreements. Detroit, which entered into those agreements to hedge interest-rate risk on pension debt, agreed to a settlement earlier this year to pay $85 million to the swap providers. Syncora has maintained the settlement would cause it financial harm.

Final votes on Detroit’s plan to emerge from bankruptcy this fall were submitted on Friday by its creditors, including Detroit workers and retirees, and the city is expected to file a formal tally of those votes in federal court by July 21, the New York Times reported on Saturday. Some parties involved in the process said that updates they received during two months of voting suggested that the city’s plan, which includes cuts to pension benefits, was faring well among workers and retirees and that an unofficial running vote count in recent days appeared to favor the plan. City and state officials have said that they were cautiously optimistic. Still, some involved in the bankruptcy proceedings cautioned that no final tally had been provided and that a significant number of ballots had arrived as late as Friday at the California company that is conducting the count on the city’s behalf.

Detroit’s public workers, retirees and bondholders finish voting today on a plan that would impose $7.4 billion in cuts on investors and pensioners, just short of a year after Michigan’s biggest city filed a record $18 billion bankruptcy, Bloomberg News reported today. Since the July 18, 2013 filing, Detroit Emergency Manager Kevyn Orr has been negotiating with stakeholders to put the city of 700,000 back on its fiscal feet after years of decline. Imposing cuts was the only way to continue supplying essential services and repair Detroit’s blighted landscape, according to Orr. Current and former city employees, as well as investors, would be forced to take less than the $10.4 billion they are owed if U.S. Bankruptcy Judge Steven Rhodes approves the city’s plan after a trial set to begin next month.

A consultant's report released yesterday said that holders of Detroit's $164 million of unsecured, limited-tax general obligation (GO) bonds would only get 34 percent of their investment back under the city's debt adjustment plan, Reuters reported yesterday. The 34 percent recovery listed in the July 8 report by Kenneth Buckfire, president of restructuring firm Miller Buckfire & Co., is higher than the estimated 10 percent to 13 percent rate Detroit outlined in its latest plan to adjust $18 billion of debt and exit bankruptcy. But the rate is lower than the 74 percent recovery on $388 million of unsecured unlimited-tax GO bonds, which are backed by voter-approved property taxes. Last month, federal court mediators announced a settlement over the treatment of the limited-tax bonds in Detroit's historic bankruptcy case, but disclosed no details. The announcement followed a mediation session between the city, Ambac Assurance Corp., which guarantees payments on most of the bonds, and mutual fund BlackRock Financial Management.

Michael Plummer, an art expert hired by the institute and the city to evaluate the collection and ways to raise cash from it, released a report yesterday saying that the Detroit Institute of Arts collection may be worth as much as $4.6 billion, but a sale of art works would raise less than $2 billion to pay the bankrupt city's creditors, Reuters reported yesterday. Plummer concluded that litigation and market conditions would depress prices, and that liquidating the most valuable works would eventually force the museum to close. "Rather than being a source of cash to creditors or a burden on the current city, in fact, the DIA is the single most important cultural asset the city currently owns for rebuilding the vitality of the city," Plummer reported. Some of Detroit's hold-out creditors have been pushing the city to sell or monetize art works to increase settlement payments in the city's plan to adjust $18 billion of debt and exit the biggest municipal bankruptcy in U.S. history.

Flint, Mich., the birthplace of General Motors that once had 200,000 residents, has, much like Detroit, also endured a spectacular drop in population and factory jobs and a corresponding rise in property abandonment, the Associated Press reported yesterday. If a judge rules against Flint's effort to cut its retiree health care benefits, the city is expected to join about a dozen cities or counties that have sought help from the courts since the start of the recession. "If we don't get any relief in the courts...we are headed over the same cliff as Detroit," said Darnell Earley, the emergency manager appointed by Gov. Rick Snyder to manage Flint's finances. "We can't even sustain the budget we have if we have to put more money into health care" for city workers. Flint's budget deficit is about $12.9 million, and the city will have to come up with $5 million this fiscal year unless most retirees begin paying more for health benefits and absorb higher deductibles and co-pays, Earley said.

The City of Detroit reached a tentative contract with its largest police union yesterday, potentially resolving one of the city’s last remaining labor disputes as it nears a potential exit from chapter 9 bankruptcy, the Detroit Free Press reported today. The tentative deal — reached in confidential mediation talks — came three days before votes are due on the city’s bankruptcy restructuring blueprint, called a “plan of adjustment.” The Detroit Police Officers Union has agreed to recommend a “yes” vote on the plan after reaching a multiyear deal on wages, pensions and health care benefits, lead bankruptcy mediator Gerald Rosen said in a statement. The union and the city agreed to continue negotiations to try to reach a five-year deal.

Detroit Mayor Mike Duggan, who took office in January, promised immediate improvements after the city hit a low point last year, becoming America’s largest to file for bankruptcy, the New York Times reported today. The city has targeted Detroit’s North End as among the first neighborhoods for renewal. Situated just above the city’s vibrant Midtown and Downtown corridor, the North End is ripe for commercial and residential development. The city is offering financial incentives for employees of Wayne State University and two nearby hospitals to rent or purchase homes in parts of the North End. It already has some stable housing stock and deeply rooted families in which mothers and brothers, cousins and uncles all live around the block from one another, occupying homes that have been in their families for three or four generations. New people and also organizations are moving in, like the Michigan Urban Farming Initiative, started by two University of Michigan graduates in their 20s. The city has already started tearing down blighted homes all over, including in the North End, where nearly 70 houses have been demolished so far this year and about 240 more are under contract to be razed.

A legal challenge in Detroit's municipal bankruptcy case must be heard before a trial on the city's debt-cutting plan, a federal appeals court ruled yesterday, the Wall Street Journal reported today. The Sixth Circuit Court of Appeals said that a lower district court judge improperly held up an appeal by municipal bond insurer Syncora questioning the city of Detroit's use of casino tax revenue during the case. "In a bankruptcy case of such scope and complexity, that is not the proper way to adjudicate appeals that implicate legal questions of fundamental importance to the bankruptcy proceedings," the Sixth Circuit Court of Appeals said in its ruling. By ordering the lower court to act, a federal appeals court may have thrown a potential wrench in the timetable to exit the city of Detroit from municipal bankruptcy by this fall. The appeals court ordered a federal-district court judge to rule by July 14 on a request by Syncora Guarantee Inc. and its associated Syncora Capital Assurance Inc. to stop the city from using its casino tax revenue rather than preserve the funds potentially to pay back creditors including Syncora. The city generates about $170 million a year from taxes levied on its three casinos.