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 The complicated settlement rests on a tender offer for $5.2
billion of the city's water and sewer revenue bonds. The deadline
for bondholders to tender their debt voluntarily for repurchase is
Aug. 21, the same day the trial is to begin, with the final
settlement possibly becoming firm weeks later, in the middle of the
proceeding.
Because the settlement could significantly alter the proposed
restructuring plan that U.S. Bankruptcy Judge Steven Rhodes will
weigh at the trial, some city creditors are asking for a two-week
delay to the start date. They say that would give the city enough
time to file a new version of the plan incorporating the settlement.
In a hearing on Tuesday, Rhodes, who has already delayed the trial
once, appeared to agree.
Detroit wants to maintain the current schedule and has suggested
moving testimony on the revenue bond settlement toward the end of
the trial. If Rhodes decides the plan is fair and feasible, then the
delay will make it hard for Detroit to meet some of its deadlines,
lawyers for the city said at Tuesday's hearing.
"Understand what you're asking the court to do," Rhodes said to the
lawyers. "You're asking the court to start a confirmation hearing on
a plan you don't want confirmed, knowing you're going to file a plan
two weeks later that you do want confirmed. That's very tough."
Since Detroit filed for bankruptcy protection more than a year ago,
it has reached a long string of settlements on its $18 billion in
debt and obligations.
But coming to an agreement around Detroit Water and Sewerage
Department debt had seemed nearly impossible, and in July most of
the bondholders voted against the city's debt adjustment plan. Last
week, though, the DWSD announced the tender offer, saying those who
agree to exchange their current debt for new bonds will not be able
to oppose the restructuring plan.
There is a possibility, though, that not enough bondholders will
tender their debt or the offer will not create "sufficient savings,"
Heather Lennox, an attorney for the city, said at the hearing. At
that point, the current bankruptcy plan's treatment of the bonds
will stand.
Three counties, meanwhile, whose residents pay for and receive DWSD
services, object to the plan's proposed diversion of millions of
dollars in department revenue to city pension payments. They claim
that money is needed for critical water and sewer system
improvements. On Tuesday, Rhodes allowed their objections to move
forward.
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WATER PLAN HAS MANY FACETS
Detroit outlined its tender offer for $2.75 billion of sewer bonds
and $2.433 billion of water supply system bonds in a court filing
late on Monday. It offers various purchase prices as percentages of
the par amounts of the senior and second lien bonds.
If enough bonds are returned, Detroit would have to decide whether
to finance the tender by issuing refunding bonds through the
Michigan Finance Authority, with Citigroup as the senior
underwriter, or by privately placing debt with Citibank and other
yet-to-be determined financial institutions.
On Tuesday, the state authority approved the set-up and authorized
the sale of $175 million of new debt for the department's capital
needs in the coming year.
Under the public sale, the pricing date would be Aug. 26 with
settlement on Sept. 4. The option calls for a portion of the 30-year
bonds to be insured by Assured Guaranty and projects bond coupons of
5.75 percent or less.
With the new bonds, the city will seek a court order that water and
sewer net revenue pledged as security constitutes a lien on special
revenue.
The tender offer also reflects a deal between Detroit and four bond
insurance companies, an ad hoc committee of bondholders and the bond
trustee to tap no more than $24 million a year in water and sewer
revenue for the city's General Retirement System, far less than the
$43 million the city originally sought.
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