%1

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.

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.

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.

A federal appeals panel that was asked to hear a challenge to Detroit's eligibility for bankruptcy protection said that it will confer with the federal district judge overseeing mediation with city creditors before deciding whether to take the case right away, Bloomberg News reported yesterday. Bankruptcy Judge Steven Rhodes ruled in December that Detroit is eligible for chapter 9 protection and that the Michigan constitution gives municipal pensions the status of contracts that can be altered in bankruptcy. The city's two pension funds filed for a direct appeal to the U.S. Court of Appeals in Cincinnati, bypassing the federal district court. Detroit opposes an immediate appeal, as does the state solicitor general. The city has argued that allowing an appeal will delay progress in mediation. The Michigan attorney general sided with the pension plans, while Rhodes recommended against an appeal at this time. The appeals court notified the parties on Feb. 7 that a three-judge panel will confer with U.S. District Judge Gerald Rosen, who serves as the lead mediator between Detroit and its creditors. The panel said that it will confer with Rosen about the status and time frame for mediation.

Detroit's emergency manager said yesterday that he expects to push back the date he will file city's debt-cutting plan in bankruptcy court, the Wall Street Journal reported today. "The City had hoped to file its plan of adjustment and disclosure statement with U.S. Bankruptcy Court at the end of this week, but that time frame is likely to be moved back until next week to accommodate ongoing negotiations and mediation meetings," Emergency Manager Kevyn Orr said yesterday. "The City nonetheless remains prepared to file its plan on or before the March 1 deadline established by U.S. Bankruptcy Judge Steven Rhodes.” This week's negotiations could alter the balance of payments to 27 creditor classes identified in the plan. Of those, 16 stand to receive less than what they are owed by the city. Last month, Mr. Orr sent creditors a draft of the proposed debt-reorganization plan. While the creditors can object to, and will have a vote on, the so-called plan of adjustment on what the city owes to them, Judge Steven Rhodes will have the final say to approve or deny the plan. To date, Detroit and its creditors haven't commented publicly on the draft plan that addresses the city's long-term obligations previously estimated at $18 billion.

Insurance companies have joined the list of parties that want to pry open the records of secretive bankruptcy trusts that plaintiff lawyers set up to pay asbestos-related claims, Forbes.com reported on Friday. Humana, Aetna, Blue Cross and Blue Shield, and hospital networks operated by Johns Hopkins and Tufts have filed a complaint in state court in Philadelphia demanding claims records from the H.K. Porter Asbestos Trust. The insurers say they need the names of plaintiffs who have recovered money from the trust so they can be reimbursed for medical expenses they paid to cover the same asbestos-related illnesses. In a similar so-called subrogation action, insurers are preparing to sue Pfizer in federal court in New York to recover some of the $1.2 billion the pharmaceutical maker agreed to pay to settle lawsuits linked to its Quigley unit, which filed for bankruptcy in 2004. In that case, United, Humana and other insurers say the secrecy of the Pfizer settlement with some 230,000 plaintiffs prevents them from demanding reimbursement for medical costs already incurred.

Long powered by the Big Three automakers, the bankrupt Motor City today is relying on casino cash, the Wall Street Journal reported today. Taxes drawn from Detroit's three casinos have been the subject of months of tense negotiations in the city's municipal bankruptcy case. Detroit pledged the casino revenue as collateral in a 2009 deal with two of the world's biggest banks that was aimed at securing lower interest rates. That bet went sour, contributing to the city's financial woes. Now, two potential settlements with the banks have been rejected by Bankruptcy Judge Steven Rhodes, who is presiding over Detroit’s bankruptcy case, putting the casino revenue at risk. Casinos are considered essential to the city's revitalization plan because cash-poor Detroit draws more wagering-tax revenue from its three gambling halls and attached hotels, opened a decade ago, than from the taxable property value of assembly lines at Ford Motor Co., Chrysler Group LLC and General Motors Co. But like the auto industry before it, local casinos could soon contribute less to the city's coffers as competition heats up from newer casinos within driving distance. Last year, taxable revenue from casinos fell 4.7 percent to $1.35 billion, the biggest year-to-year drop ever, according to the Michigan Gaming Control Board.