8.22.13

Gambling on Detroit’s Future. U.S. Bankruptcy Judge Steven Rhodes yesterday held a hearing to address a number of issues affecting the sustainability of Detroit’s future and the transparency of financial data. The trigger came from a bond insurer, Syncora Guarantee, Inc., trying to halt Detroit’s sole pre-bankruptcy filing settlement, which would terminate a series of interest-rate swaps hedging $800 million of the city’s pension certificates. Syncora is seeking to dissolve a temporary restraining order stemming from a fight with the city over $180 million worth of annual revenue from the city’s three casinos. Syncora wants to depose city officials and conduct discovery in connection with a lawsuit that is playing out on the sidelines of the Detroit bankruptcy case. Detroit has requested that Judge Rhodes approve an agreement that would give the city access to the revenue, which would be critical to Emergency Manager Orr’s $1.25 billion plan to improve city services and create foundation for future sustainability, as well as because it would permit the city to use the casino revenue as collateral to secure debtor-in-possession financing. Such a financing provision typically gives the lender a priority lien—something which could affect the liens of all of the city’s creditors. Syncora, which insures both the pension certificates and swaps, requested the U.S. court to allow it to “trap” the casino revenues, which are used as collateral on the swaps, until Judge Rhodes’ expected decision on the settlement early next month. Under the settlement, Detroit is to pay UBS AG and Merrill Lynch 75 cents on the dollar to terminate the swaps at a penalty currently estimated at just under $300 million. The agreement would give the city access to roughly $11 million a month in casino revenue currently used as collateral on the swaps. The banks would promise not to pursue insurance payments from Syncora. Prior to the announcement of the settlement, Detroit had filed suit against Syncora, which had instructed the swap custodian to hold back all casino revenue in light of the city’s June default on a $40 million debt service payment on the certificates. Detroit won a temporary restraining order against the freezing of the revenue; Syncora has countersued.

Detroit’s attorneys yesterday testified before Judge Rhodes that access to the casino money is “probably the highest-quality tax stream the city has…Being able to use the revenue stream is pivotal;” while Syncora countered that the swap termination would negatively affect the firm’s financial position, that Emergency Manager Kevyn Orr repeatedly misrepresented the nature of the swaps, which have provisions designed to protect the insurer, and that the casino revenues are exempt from the automatic stay: “Put simply, Syncora’s exposure will grow dramatically if the city and the swap counterparties are allowed to avoid the operation of the collateral agreement and Syncora’s consent rights under the swaps – and that exposure will easily outstrip the ostensible ‘release’ Syncora will obtain if the swaps are allowed to terminate.” Mayhap ironically, Syncora also testified that Detroit is not in desperate need of the revenue, citing Mr. Orr’s restructuring plan as evidence—which plan projects a net operating surplus of $227 million for 2014 without the casino revenue: “The city’s desire for cash is not a basis to disregard the plain language of the collateral agreement, which was designed to operate automatically.” Highlighting another federalism related aspect of the legal proceedings, Ambac, in its 16 court filing, called the validity of the swaps lien on casino revenue “highly dubious.” The bond insurance firm claimed it was in violation of Michigan state law, which does not allow casino revenue to be used as collateral on a financial obligation. Judge Steven Rhodes ordered Emergency Manager Kevyn Orr and two other unnamed individuals must sit for depositions that will last six hours, during which time Mr. Orr will face questions in relation to the civil lawsuit over the casino revenues—no deposition date was set, but Judge Rhodes recommended they be scheduled as “promptly as possible.”

Why so secret? U.S. Bankruptcy Judge Steven Rhodes yesterday also questioned why the city was being so secretive about giving people access to financial projections and expert reports, and why the city is demanding that creditors in the bankruptcy case sign non-disclosure agreements before being allowed to view financial reports and other data:

“Doesn’t the city want every one of its citizens to know what the financial future is?” Judge Rhodes asked city bankruptcy lawyer Gregory Shumaker.

“Yes,” the lawyer said.

“What’s the problem?” the judge said.

“There are a lot of scenarios played out in those projections,” the lawyer said. “The city believes it would not be in its best interest for it to be disseminated in the public.”

“Ok,” the judge countered, “but why not? What would the harm be?”

“Your honor, it is hard to imagine the different scenarios that might develop with the information,” Shumaker said.

“Generally speaking, speculation and conjecture are not the basis for confidentiality,” Judge Rhodes countered.

Thus the issue yesterday afternoon was why a digital “data room” (a digital vault of financial information that includes what the city’s fiscal future could look like) should be kept from the public. The city, under Emergency Manager Kevyn Orr, set up and provided the content for the password-protected data room and allowed access to creditors involved in the historic Detroit bankruptcy filing only if they signed a nondisclosure agreement. Creditors and the Emergency Manager’s office have, so far, been unwilling to reveal what is included in the data; however, representatives from the city’s unions and pension funds as well as corporate creditors have been given the password after agreeing to the nondisclosure agreement. On July 10, eight days before Detroit filed for chapter 9, a United Auto Workers attorney, Michael Nicholson, refused to sign the nondisclosure agreement that covered the data as well as discussions held that day in a meeting with Jones Day representatives regarding the city’s pensioners. Mr. Nicholson yesterday testified that he was pleased to see a hearing had been set on the information.

Representing Retirees. A group of retired city workers who are expected to fight to preserve vested pension benefits targeted for cuts during the city’s Chapter 9 bankruptcy case has been selected, according to a filing Wednesday yesterday in Judge Rhodes’ federal bankruptcy court. The select group will represent more than 23,500 former municipal workers during Detroit’s historic bankruptcy case. The filing ensued one day after U.S. Trustee Daniel McDermott interviewed retiree applicants at U.S. District Court. About 90 people applied to serve on a committee that could have nine members, give or take, he added. Trustee McDermott said the committee can hire attorneys and accountants to work on retirees’ behalf, with the bills paid by the city—meeting the goals of both Emergency Manager Kevyn Orr and U.S. Bankruptcy Judge Steven Rhodes to ensure that retired workers who are not represented by unions can have a voice during the bankruptcy.

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