Reuters reports the city of Detroit is one step closer to completing its bankruptcy. According to the report, Detroit and certain bondholders have agreed on a plan to significantly reduce bondholder losses and potentially help Detroit make agreements with other creditors.
Bondholders make deal
If the bondholders agreement is approved by the courts it will “reinstate $287.5 million of the $388 million in claims on unlimited tax general obligation bonds insured by National Public Finance Guarantee Corp, a unit of MBIA Inc, Assured Guaranty Municipal Corp and Ambac Assurance Corp.”
This is a win for bondholders who have fought with the city over how they will be repaid. Most recently Detroit was offering as little as 15 cents on the dollar, but with the new agreement, Detroit bondholders could recover as much as 74 cents on the dollar.
What does the new bondholders settlement cover specifically? If the settlement is approved, according to Orr, it will “confirm the special status of the unlimited tax general obligation bonds and ensures that pledged property tax revenues will be used to fund future debt service.” It would also provide extra security for certain bonds if tax revenues are not has high as anticipated in the future.
Finally, the bondholders settlement will also allow an additional $100 million to be used for an income stabilization fund for the city’s “most vulnerable retirees.” The announcement was met with general optimism when the shares for the bond insurers involved in the settlement increased more than 1.6 percent in midday New York trade.
Kevyn Orr, Detroit’s emergency manager, has also updated the city’s bankruptcy plan and plans to release it very soon. Orr has been working tirelessly to finish the creditor negotiations and end what has been largest municipal bankruptcy filing in the United States.
All changes must be approved by U.S. Bankruptcy Judge Steven Rhodes who is also expected to rule on another interest rate swap proposal Detroit has made with UBS AG and Merrill Lynch Capital Services, a unit of Bank of America Corp.
Labor deals implored to come to the negotiating table
Orr argues that this settlement in conjunction with the one announced last month should give everyone hope that real work is being done to settle debt issues for the city. Unfortunately, not all creditors are willing to come to the negotiating table. Wednesday Orr made another plea to labor parties. “I implore all parties, specifically our labor parties, please come in and do deals. I do not want to do a cram-down in this case.”
If a cram down is used it will allow the city to impose settlement terms on certain classes of creditors after other classes of creditors have made agreements, but Orr notes cram downs are very expensive and could involve “time-consuming litigation.” Other experts note the rules are not clear-cut in Chapter 9, and this could also cause some issues if the city is forced into litigation.
Unfortunately, although Orr and company seem to be doing all they can to expedite the bankruptcy of Detroit, there is a case still pending at the appeals court to determine if Detroit is legally allowed to file Chapter 9 bankruptcy.
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