Fitch Ratings said yesterday that Detroit's plan to deal with its $18 billion of debt and emerge from municipal bankruptcy would set a troubling precedent for the U.S. municipal bond market, Reuters reported yesterday. Under the plan Detroit filed in U.S. bankruptcy court on Friday, owners of certain general obligation (GO) bonds would take an 80 percent haircut on their investments. The city's two pension funds, meanwhile, would see higher recovery rates, aided by pledges worth about $830 million from philanthropic foundations, the Detroit Institute of Art and Michigan Governor Rick Snyder, who still must win legislative approval for the state's $350 million share. The rating agency took particular issue with the treatment of voter-approved unlimited tax GO bonds as unsecured. Insurance companies that guaranteed debt service payments on those bonds have sued the city over this treatment.
Detroit's blueprint for dealing with $18 billion in debt and emerging from municipal bankruptcy requires cuts to worker pensions and even deeper cuts for bondholders, Reuters reported on Saturday. The potentially precedent-setting plan the city filed in bankruptcy court on Friday would cut retired worker's pensions by up to 30 percent while owners of bonds deemed unsecured would lose up to 80 percent of their investment. The fact that voter-approved general obligation bonds were lumped into the city's $12 billion unsecured debt pile has roiled the U.S. municipal bond market. Retirees and pension funds argued the proposed cuts go too deep, while bond insurers complained that bondholders were being treated unfairly and forced to bear most of the losses. Kevyn Orr, the city's state-appointed emergency manager, acknowledged that the plan is far from final, and will be subject to negotiation in the weeks ahead. http://www.reuters.com/article/2014/02/22/usa-detroit-bankruptcy-idUSL2…
In related news, Detroit’s creditors would be smart to take the deal laid out by Emergency Manager Kevyn Orr’s proposed reorganization plan, according to an editorial in yesterday’s Detroit News. While there’s a slight chance the pensioners and banks could fare better by mounting a prolonged fight, it’s more likely they’ll do worse. Pensioners particularly should weigh the merits of Orr’s plan of adjustment. This process began with them facing the loss of half to two-thirds of their benefits, had they been treated the same as other creditors. While most banks and bondholders are being asked to accept an 80 percent reduction in what they’re owed, general service retirees will lose 34 percent, and police and fire retirees 10 percent of their monthly checks. But if they settle quickly, according to the editorial, those numbers improve considerably, to a 26 percent loss for general service pensioners and 4 percent for retired cops and firefighters. http://www.detroitnews.com/article/20140223/OPINION01/302230004/-1/rss23
The U.S. Court of Appeals for the Sixth Circuit on Friday said that it will hear direct appeals by seven groups of petitioners, including pension plans for Detroit's police and firefighters, regarding the city's eligibility for bankruptcy, Reuters reported on Friday. "Upon consideration of the petitions to appeal and the responses thereto, a direct appeal to this court is warranted," the court said in an order filed on Friday. It said it would not expedite the appeals for the time being. In a December ruling, Bankruptcy Judge Steven Rhodes said that Detroit was eligible to pursue its bankruptcy case. In his ruling, Judge Rhodes said Detroit met federal requirements for bankruptcy protection primarily because it was insolvent and negotiations with its thousands of creditors were not practical.
Detroit's state-appointed emergency manager expects to file a roadmap in federal court on Friday detailing how the city will treat some $18 billion of debt and other obligations as it tries to exit bankruptcy, Reuters reported yesterday. "Friday is the present expected day to file," said Bill Nowling, a spokesman for Kevyn Orr, the city's emergency manager. Bankruptcy Judge Steven Rhodes, who is overseeing Detroit's bankruptcy case — the largest municipal bankruptcy in U.S. history — set a March 1 deadline for the plan. The city sent a proposed plan to adjust its debts to creditors on Jan. 29. The city said that the proposed plan reflected discussions with creditors and said it could be modified before being presented in court.
An attorney representing Detroit said yesterday that the city intends in coming days to propose a new settlement in bankruptcy court to end costly interest-rate swaps, the third such attempt since the city declared bankruptcy, Reuters reported yesterday. Robert Hertzberg, a partner at law firm Pepper Hamilton, told Bankruptcy Judge Steven Rhodes that the city will file a motion in the next three or four days. Judge Rhodes rejected two prior settlement proposals with swap counterparties UBS AG and Merrill Lynch Capital Services, calling them too costly for the city. Notice of the new deal came during a hearing on other matters in the city's historic bankruptcy, including whether Detroit is obliged to pay off voter-approved general obligation bonds and the need for an unsecured creditors committee in the case.
A federal judge yesterday gave Detroit and a group of bond insurance companies two or three weeks to settle a dispute over whether the city can treat certain bonds as unsecured debt, warning of an "all or nothing" ruling if no deal is reached, Reuters reported yesterday. The outcome of the dispute could significantly affect the $3.7 trillion municipal bond market, where general obligation bonds backed by the full faith and credit pledge of cities, school districts and others has long been considered sacrosanct. If the general obligation debt in question is ruled to be unsecured debt in this case, as Detroit's lawyers argue it should, it could result in investors demanding higher premiums to lend to the city and other local governments in Michigan. After hours of testimony, Judge Steven Rhodes encouraged the parties to mediate their differences in the coming weeks. Should they fail to do that, he said that he would be forced to make a ruling in favor of one party or the other.
Detroit's creditors and residents this week are expected to get their first official glimpse of the road out of bankruptcy, although fights and tinkering over many of its most contentious elements likely will continue, the Associated Press reported today. As early as today, state-appointed emergency manager Kevyn Orr could file his proposal for restructuring the city's debt to the bankruptcy court. The plan of adjustment, due by March 1, is a blueprint of sorts for Detroit, which is undergoing the largest municipal bankruptcy in U.S. history. "The numbers may change dramatically after this plan is filed," said Wayne State University law professor Laura Bartell. "They'll keep amending it until they feel they've reached what they need." The restructuring plan, a 99-page draft of which The Associated Press obtained last month, reflects that complexity. It calls for retirees and pensioners to receive $4.3 billion in payments and bondholders about $1.1 billion during the next 40 years. That would leave a surplus of nearly $336 million for the bankrupt city, which has an estimated debt of at least $18 billion.
Bankruptcy Judge Steven Rhodes will consider litigation over whether Detroit's pledge of tax revenue to pay off voter-approved bonds is a binding obligation or merely a promise that the broke city cannot keep, Reuters reported today. The outcome of the dispute before Judge Rhodes could have a far-reaching impact on municipal finance as unlimited tax general obligation bonds traditionally have been considered secured debt, making them one of the safest bets for investors. Detroit Emergency Manager Kevyn Orr has deemed some $410 million of general obligation bonds outstanding at the end of the city's fiscal 2012 as unsecured debt, and the city defaulted on an Oct. 1 payment on the bonds.
Detroit’s historic bankruptcy has evolved into a populist fight between retirees and banks, as the city prepares to unveil a critical plan next week to shed some of its $18 billion in debts, the Detroit News reported today. Gov. Rick Snyder and Detroit Emergency Manager Kevyn Orr recently have made moves that fueled the fight, as the governor signaled a desire to treat pensioners better than investors of city bond debt. He has pledged $350 million in state assistance for pensioners, while telling Wall Street it will not be getting special treatment. In recent weeks, Orr has taken a more aggressive stand against Wall Street financial institutions, including filing suit to invalidate a disastrous 2005 debt deal blamed for plunging Detroit into bankruptcy. Orr’s debt-cutting reorganization plan, which he said Monday is set to be made public next week, is expected to give retirees a larger percentage of the billions they’re owed over the amount bondholders are likely to recover from the $369 million they lent the city.
