%1

The Puerto Rico Electric Power Authority may miss a January interest payment to investors, according to Municipal Market Advisors, potentially triggering the largest restructuring ever of state and local debt, Bloomberg News reported yesterday. The agency, called Prepa, used $41.6 million of reserve funds to help make a $417.6 million payment to bondholders on July 1. With the reserve now depleted by about 10 percent, “we expect the bond trustee is unlikely to make any more distributions to bondholders, reserving cash for likely litigation expenses,” Matt Fabian, a managing director at Concord, Massachusetts-based MMA wrote today in a report. The next payment is due Jan. 1, according to Fabian. While a new law aims to restructure some Puerto Rico public-corporation debt outside of a bankruptcy filing, Prepa’s $8.6 billion alone exceeds the $8 billion of general obligations and water-and-sewer debt in Detroit’s record bankruptcy and Jefferson County, Alabama’s $4.2 billion failure.

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.

Puerto Rico’s non-voting representative in the U.S. Congress is exploring changes to federal law that would allow the commonwealth’s municipal agencies to file for bankruptcy to restructure their debts, Bloomberg News reported yesterday. Pedro Pierluisi, whose formal title is resident commissioner, will ask congressional leaders about introducing a bill that would alter the U.S. Bankruptcy Code to let the agencies seek court protection from creditors, just as cities including Detroit and Stockton, Calif., did when they determined they were unable to meet financial obligations. “It would be logical and appropriate for the code to be amended to authorize public agencies and instrumentalities in Puerto Rico to file under chapter 9 to the same degree and extent as their counterparts in the 50 states,” Pierluisi, a Democrat, said yesterday, referring to the section of bankruptcy law that covers municipalities. States and territories are barred from filing for bankruptcy. Puerto Rico lawmakers took matters into their own hands last month, passing a Recovery Act that would allow some public corporations to negotiate with bondholders, potentially forcing them to accept unfavorable terms. The Puerto Rico Electric Power Authority, which supplies most of the island’s electricity and owes $8.6 billion, may be a candidate to reduce its debt load under the new law.

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.

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.

The judge in Stockton, Calif.’s bankruptcy ruled yesterday that the city has collateral worth $4 million with which it could pay holdout creditor Franklin Templeton, dismissing the city's contention its collateral was worthless, Reuters reported yesterday. At the same time, Bankruptcy Judge Christopher Klein made no ruling on Tuesday on whether the California Public Employees' Retirement System (CalPERS) should be made to accept less than the entire amount it is owed while bondholders take losses in the case. Judge Klein's ruling on the collateral in the case of Stockton, which filed for bankruptcy in June 2012, followed a trial that concluded last month and centered around Franklin's objection to the city proposing to repay it less than a penny on the dollar for a debt of about $36 million. The city's collateral against bonds held by Franklin includes two golf courses, a community center and a park, which the city had estimated had no value. Franklin had pegged their value at $6.12 million to $17.34 million.