12.24.13

T’was the Day before Christmas…Chief U.S. District Judge Gerald Rosen, who is coordinating an unprecedented quintet of federal judges appointed to help mediate between the Motor City’s creditors, last week warned the city and others failure to attend today’s Christmas Eve session “shall be grounds for the imposition of immediate sanctions, including entry of a default judgment.” Judge Rosen’s order, which was sent to attorneys for Detroit, UBS AG, Bank of America, European banks holding Detroit pension debt, and insurers of that debt is intended to continue in Detroit’s federal courthouse until there is some resolution over an agreement to borrow $350 million and untangle a troubled debt deal blamed for plunging Detroit into bankruptcy. Judge Rosen had filed the order last week one day after U.S. Bankruptcy Judge Steven Rhodes abruptly halted a trial to determine whether Detroit can borrow the money in the wake of expressing his apprehensions about whether the deal to borrow money and pay UBS AG and Bank of America a $230 million fee to terminate former, and now convicted Mayor Kwame Kilpatrick’s financing arrangement was fair to the Motor City’s creditors. The issue has been singularly complicated by provisions in the federal bankruptcy code that would appear to protect agreements reached prior to a municipal bankruptcy filing―the two banks here were the only creditors that managed to reach a settlement with Detroit before the city declared bankruptcy―agreeing to let Detroit out of interest-rate swaps for 75 percent of what the city owed, or about $230 million and to give up some casino tax proceeds that the city had pledged to them as collateral for the swaps. Hat 75 percent has, understandably, raised singular hackles in a city where some retirees might end up receiving 20 percent of what they are owed. But now the agreement threatens to upset the apple cart, because it is so much sweeter than the Motor City’s other creditors have any realistic chance of realizing. Even more disquieting, as the marvelous Mary Walsh Williams of the Grey Lady writes this a.m.: “[T]hese two banks actually have a legal right to 100 cents on the dollar. The provision gives traders in swaps, options, and other derivatives a so-called safe harbor, exempting them from the usual stay that blocks creditors’ efforts to collect debts.” If you are not yet fully confused, the situation is still further complicated by the city’s efforts to borrow $350 million from still another lender, Barclays, to finance Detroit’s operations whilst in municipal bankruptcy―but Detroit needs to resolve the swaps deal before it can get the loan―and, without the loan, lawyers for the city say, it soon might not be able to meet its payroll. There, as the old playwright would note, is the rub: for Detroit to obtain a new loan would further increase its debt—making other creditors (especially think retires, employees, etc.) ever warier, if not angrier. Here, the Motor City is seeking the loan mostly to finance the cost of terminating its swaps contracts―but reserving a portion of the loan proceeds to finance public safety. It was the breakdown in these negotiations—and Emergency Manager Kevyn Orr’s declining to respond constructively to Judge Rhodes request for an explanation why 75 cents on the dollar was a good deal last week that led Judge Rhodes to suspend the hearing in his courtroom last week and order this week’s extraordinary, refereed negotiations. Should today’s second day with Judge Rosen only leave coal in tomorrow’s stockings, UBS and Bank of America would once again have the safe harbor advantage under law, likely leading Mr. Orr to sue. The mess Judge Rosen is attempting to unravel is a legacy from a soured loan agreement from the former Kwame Kilpatrick administration that was used to pump $1.44 billion into the city’s pension funds in 2005 and 2006. The deal included a complicated interest rate swap that piled on $800 million of pension debt, court records show. Last Friday, Detroit threatened to sue the two banks if they will not agree to better terms in a deal to settle the complex pension debt interest-rate transaction called “swaps,” which cost the city about $50 million a year, or 5% of its revenue. If by the end of the day, the Motor City may sue to have the original 2005 swaps deal voided. Or, maybe, Santa will intervene.

Less Harried in Harrisburg. Pennsylvania Governor Tom Corbett yesterday afternoon announced the successful closing of two major transactions outlined in the Harrisburg Strong plan that mark a critical step forward in restoring financial stability to the City of Harrisburg―the sale of the Harrisburg incinerator and the lease of the city’s parking assets for 40 years, twin transactions that remove the $360 million incinerator debt and enable Harrisburg to erase its structural deficit. The successful actions are intended to ensure Harrisburg will have a balanced budget through 2016. Governor Corbett stated: “As cities throughout the country face dire fiscal emergencies, we have never given up on Harrisburg and its people…By working as a team, we have been able to develop strong, cooperative solutions for the people in our capital city. I would like to thank General Lynch (Harrisburg’s Receiver, appointed a year ago last May) and all those who have worked together to achieve a resolution and know that this excellent work will continue until the job is done.” General Lynch noted: “While there is still much work to be done, these transactions provide the city officials the tools to craft a predictable and stable economic future.”

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