Since Detroit filed the biggest municipal bankruptcy in U.S.
history last July, Syncora has objected to the city's moves nearly
every step of the way - from an early agreement with investment
banks over interest rate swaps to the more recent “grand bargain”
designed to save the Detroit Institute of Arts.
The company's latest pleading, set for argument Thursday in a
federal courtroom, demands information on the current assets and
income of all Detroit's retired workers - some 20,000 of them.
Syncora has issued past warnings to investors that it might go out
of business, and it cautioned in a recent financial report that
investment in Syncora Holdings common shares is "likely to result in
a loss of substantially all of their investment."
In the financial statement, Syncora warned of a "liquidity mismatch"
in which claims might exceed recoveries from the claims, and noted
that reserves for losses "are modest" when compared with estimated
With so much at stake, Syncora has filed a steady stream of
objections to Detroit emergency manager Kevyn Orr's carefully
synchronized effort to emerge from bankruptcy this fall.
The bond insurer has raised questions about the bankruptcy court's
conduct. It has sent subpoenas to Michigan Attorney General Bill
Schuette; Roger Penske, chief executive of Penske Automotive Group
Inc., and Daniel Gilbert, the co-founder of Detroit-based Quicken
It also has objected to the "grand bargain" in which philanthropic
foundations and the state of Michigan have pledged millions of
dollars to ease pension cuts on city retirees and protect parts of
the Detroit Institute of Arts' collection from being sold.
Judge Steven Rhodes, who is overseeing the Detroit bankruptcy case,
will hear motions to block several Syncora demands, including the
request for retirees' financial information.
"The only possible explanation for this outrageous request is that
Syncora is attempting to gain a litigation advantage by harassing,
oppressing and embarrassing the city and its retirees," the city
stated in its motion urging the judge to deny Syncora's demand.
James H.M. Sprayregen, a partner at Kirkland & Ellis who represents
Syncora, said Syncora's request is reasonable given the city is
citing the greater economic harm to retirees versus financial
creditors for justifying the disparate treatment of those creditor
groups. He added that Detroit's plan will not win confirmation from
Judge Rhodes because it does not meet a standard under Chapter 9
bankruptcy law that all similarly situated creditors must be treated
“We think (Detroit) proposed a patently unconfirmable plan,"
In a filing Monday, Syncora accused Detroit of playing politics in
its bankruptcy case.
"Chapter 9 bankruptcies are a tempting place to break out the
torches and pitchforks and pursue the city’s lenders through the
streets," Syncora's filing said. "It is a time-honored and
politically-popular approach. But the bankruptcy code deplores — and
forbids - a city from favoring one class while showing animus and
unfairness to another."
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Syncora's beef with Detroit centers on the company's insurance
policy on some of the city's $1.4 billion of taxable city pension
debt, as well as swaps deals Detroit used to hedge interest-rate
risk. Guarantees offered by XL Capital Assurance, Syncora's
predecessor company, enabled Detroit to sell its debt with a stellar
triple-A-rating to investors, including European banks.
When Detroit defaulted on the debt in June 2013, it left Syncora and
another insurer, Financial Guaranty Insurance Co, to pay
bondholders. Syncora and FGIC both have seen their financial
conditions crumble since the 2008 financial crisis.
Like other bond insurers, Syncora had exposure to mortgage-backed
securities, a market that collapsed. Standard & Poor's in 2010
stopped rating the company and Moody's Investors Service followed
suit in 2012.
In addition to Detroit, Syncora in its financial filings lists
"significant exposure" to Puerto Rico, an ailing muni issuer, and
Syncora also insured some debt issued by Jefferson County, Alabama -
the biggest-ever Chapter 9 case prior to Detroit's.
Regulators in 24 states have yanked Syncora's license to insure
debt, and the last time Syncora insured new muni debt was in 2008,
according to Thomson Reuters data.
Sprayregen said Syncora is facing a near-total loss on its Detroit
exposure, a circumstance that motivates its hard fight.
"Our recovery is virtually nothing, so anybody who portrays what
we’re doing as irrational isn’t really understanding the situation,"
Sprayregen said. "If you’re offered nothing, what choice do you have
but to object?”
Stephen Selbst, a bankruptcy attorney with Herrick, Feinstein in New
York, said Syncora may be seeking to maneuver Detroit toward
"If you’re a holdout creditor, doing everything you can to make
everyone else miserable is an old-fashioned strategy and the core of
that is make it so uncomfortable for the debtor that they want to
come to the table and settle,” he said.
(Reporting By Karen Pierog, additional reporting by Tom Hals and
Lisa Lambert, Editing by David Greising and Ken Wills)
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