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 Additionally, Detroit might no longer try to classify nearly $400
million of voter-approved general obligation bonds as unsecured, a
threat that had been a chilling prospect for municipal bond
investors who have long viewed so-called GO debt as that market's
safest investments. Their final status is still under discussion,
but the settlement assures they will receive a superior payout than
other unsecured creditors.
The deal also aims to provide a safety net for city retirees at risk
of falling below the poverty line.
Terms of the settlement, announced by U.S. Bankruptcy Court
mediators in a case brought by the bonds' insurers, mean that
bondholders will receive $287.5 million of $388 million they are
owed from a dedicated stream of tax revenue backing the debt, known
as unlimited tax general obligation bonds.
That is about 74 cents on the dollar compared with a recovery rate
of 15 cents on the dollar for other unsecured debt holders under the
city's latest adjustment plan proposal.
The remaining $100 million in tax revenue would be divided between
about $27 million in back payments on bonds and establishing an
income stabilization fund to ensure city retirees, who are likely to
see their benefits reduced in the bankruptcy, stay out of poverty.
The deal, struck with three bond insurers that had sued the city
last fall — National Public Finance Guarantee Corp, a unit of MBIA
Inc; Assured Guaranty Municipal Corp and Ambac Assurance Corp — could entice other creditors toward settlements of their objections,
analysts said.
"It should increase other unsecured creditors interest in
negotiating," said Matt Fabian, managing director of Municipal
Market Advisors, an independent research firm.
Assured Guaranty wants the bonds to be considered secured debt with
a valid lien on property taxes. The three insurers claimed the city
was illegally diverting voter-approved property taxes meant to pay
off the bonds to the general fund.
The "dedicated revenue stream will continue to go to them," Detroit
Emergency Manager Kevyn Orr said in an interview following the deal
announcement. "The exact details about whether they are secured will
be in further documents."
Shares of all three insurers rose about 4 percent following the
deal.
U.S. Bankruptcy Judge Steven Rhodes must still approve any
restructuring plan.
LABOR URGED TO MAKE A DEAL
Wednesday's deal is the second agreement that Orr has struck with
creditors in Detroit's bankruptcy, as he scrambles to resolve the
largest municipal insolvency case in U.S. history by this fall when
his term expires. The city filed for bankruptcy last July, crippled
by decades of economic decline and an $18 billion debt load.
Detroit last month settled with UBS AG and Merrill Lynch Capital
Services, a unit of Bank of America Corp, over costly interest-rate
swaps. Rhodes, who rejected previous swaps deals, is scheduled to
rule on the latest deal on Friday.
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Orr urged other creditors to negotiate, including unions fighting on
behalf of the city's two pension plans. Orr's plan would cut
pensions by between 6 percent and 34 percent. The funds said in a
statement they had not yet determined whether Wednesday's settlement
is "advantageous to the city and to the retirement systems."
As more creditors settle with the city in exchange for supporting
Orr's plan, he gains leverage in negotiations with the remaining
holdouts. Still, he is reluctant to simply impose steep losses on
any creditor, known in bankruptcy circles as a "cram down," even
though bankruptcy law permits it.
"We recognize as we get additional settlements in, that (there may
be the) necessity of a cram down," Orr said. "We don't want to cram
down."
A cram down also risks protracted litigation that could threaten
other sources of financing for the city's plan, in particular the
$816 million "Grand Bargain" with the State of Michigan, private
donors and foundations to bolster city pensions while protecting the
city's renowned collection at the Detroit Institute of Arts from a
possible firesale.
"No one wants to buy litigation," Orr said.
Meanwhile, another bond insurer in the bankruptcy, FGIC Corp, said
it had received alternative proposals for city art.
FGIC, which insurers $1.1 billion of city pension debt, said it had
received proposals from "credible third parties" for acquiring or
monetizing the collection that would generate $1 billion to $2
billion for the bankrupt city, considerably more than under the
Grand Bargain.
Orr was not warm to the alternatives.
"We have no intention of selling art," Orr said. "In a Chapter 9 you
cannot compel the city to sell anything, not a park, not a zoo, not
the DIA."
(Additional reporting by Karen Pierog, Edward Krudy and Tom Hals in
New York; writing by Dan Burns; editing by G. Crosse, James Dalgleish
and Lisa Shumaker)
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