Pension funds may get more money than bondholders in Detroit

Pension funds and bondholders at odds

 

In Detroit bankruptcy news this week, Reuters reports Detroit’s bankruptcy repayment schedule outlines a plan to reduce some $18 billion in debt and long-term liabilities by paying the city’s pension funds more than Detroit bondholders. If this is allowed, the bondholder debt would be treated as unsecured debt. If the plan is accepted, the city’s proposed plan would pay pension funds around 25 cents on the dollar, compared with about 22 cents for other unsecured creditors.

Kevyn Orr, Detroit Emergency city manager, gave the proposed bankruptcy repayment plan to the creditors last week. The plan is considered one of the most important steps to complete Detroit’s Chapter 9 municipal bankruptcy. Despite negotiations, Detroit remains at odds with both pension funds and bondholders on how to make necessary cuts.

Leasing city’ water department

 

One of the main proposals offered last week included leasing the city’s water department for 40 years and setting up a health care trust to manage insurance benefits for retirees. Orr continues to negotiate with UBS and Bank of America Merrill Lynch. One earlier proposal would have allowed a lower pay-off of a $165 billion interest rates swaps deal, but the deal was rejected by the bankruptcy judge who questioned its legality.

The creditors will review the plan this week. Experts note that if it is accepted significant concessions from its pension funds and bondholders will be required to settle the more than $18 billion in debt and long-term liabilities. Negotiations have been ongoing for months with Detroit’s creditors, which number in the thousands. If creditors do not accept the deal and decide to litigate, it would be extremely costly for them.

Experts have described the negotiations process as a “moving target.” Nothing has been settled due to the complexity of the discussions. Also clouding negotiations are the offers by philanthropic foundations and the state of Michigan to raise some funds through private donations. An estimated $470 million has been pledged by the philanthropic foundations and the Detroit Institute of Arts. The state has pledged an additional $350 million. If this money is accepted, it would be used to fund payments to the fire and pension funds and the city would stop making payments to them.

Additionally, the city has proposed issuing about $1.36 billion in new debt. According to Reuters, if new debt is issued, “roughly 28 percent of settlement funds would go to pensions and 25 percent would go to bondholders.”

Experts question issuing new debt

 

Critics have voiced concern about the city issuing any more debt to repay their creditors. According to experts, the new debt may not be the best solution because it could make it more difficult for them to borrow money and sell bonds in the future.

Selling debt may already be difficult given that the city defaulted on previous bond commitments which were due to bondholders of its pension funds and general obligation debt, leaving bond insurers to make the payments. Evidence that the municipal market may question the security of Detroit general obligation bonds was clear when the interest rates spiked to the highest level since November, at 7.8 percent, last year the bonds yielded 5.12 percent, reflecting greater confidence among bond investors that Detroit could meet its bond repayment obligations.

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Beth

Beth L. is a content writer for Better Bankruptcy. Good content and information is one of many methods we utilize to bring you the answers you need.