12.30.13

Racing to the Appeals. The Motor City’s two pension funds have filed a request with the U.S. 6th U.S. Circuit Court of Appeals, seeking an expedited appeal of U.S. Bankruptcy Judge Steven Rhodes’ December 3rd ruling that Detroit is eligible for Chapter 9 and that its pensions can be cut, saying the case has national implications that warrant a speedy review, noting: “If any bankruptcy case ever warranted an immediate, direct appeal, it is this case…The bankruptcy court’s eligibility decision involves nationally significant, unresolved legal questions that will determine the fate of the largest municipal bankruptcy in American history, and may set the template for future Chapter 9 cases.” The union attorneys wrote: “Delay risks irreparable harm to the pension funds and other creditors…Resolution of the city’s eligibility will have life-changing consequences for active and retired police officers, firefighters, librarians, government clerks, public works employees, and many others.” The 355-page filing argues that “the “stakes could not be higher” for retirees whose pensions likely will be slashed soon.”  The brief notes that at least seven other states have constitutional provisions that protect vested pension benefits, including Illinois, ergo” “The bankruptcy court’s eligibility decision involves nationally significant, unresolved legal questions that will determine the fate of the largest municipal bankruptcy in American history, and may set the template for future Chapter 9 cases…The pension benefits of all municipal employees and retirees in the state of Michigan are at risk.” The suit further noted that the Plan of Adjustment which Detroit Emergency Manager Kevyn Orr hopes to complete by next week “[W]ill almost certainly include commitment of the city’s future revenues and pledge of its assets, which may make it impossible for this court to fashion effective relief to protect the pensions from impairment…The (appeals) court should decline the bankruptcy court’s puzzling invitation to delay this appeal…[as] Delay risks irreparable harm to the pension funds and other creditors.” The Motor City has more than 32,000 retirees, who receive an average of between $18,000 and $30,000 annually.

New Legal Challenge. Detroit Emergency Manager Kevyn Orr in a court filing late Friday outlined and defended the city’s revised settlement with its interest-rate swap counterparties.

Orr will be deposed Tuesday about the new settlement by Syncora Guarantee Inc. and other creditors. Bankruptcy Judge Steven Rhodes has scheduled a hearing on the matter Friday.

Detroit reached a new swap agreement with the counterparties, UBS AG and Merrill Lynch Capital Services Inc., on Dec. 24 after two days of court-ordered mediation

The new deal calls for the city to pay the banks $165 million — down from roughly $200 million — as well as $4.2 million to terminate the swaps.

That’s a roughly 62% payout on the face value of the swaps compared to 75% in the original swap settlement, making the savings about $35 million, or 13%, compared to the original agreement. The size of Detroit’s termination penalty has fallen steadily over the past few years in line with interest rates.

The new settlement prohibits the city and the banks from terminating the swaps before Jan. 31, 2014. The counterparties are currently allowed to terminate the swaps at any time, which has led the city to argue that in fact the swaps hedge nothing because the banks would simply terminate the deals if they owed the city any money.

The Jan. 31 deadline gives the two parties time to obtain a final determination from the bankruptcy court, the city said in its filing.

The banks have also agreed to release all money from accounts that hold back a piece of the casino revenue as collateral. That was true in the previous agreement as well, but the new deal features a more explicit provision, according to the filing.

“Each of these changes is beneficial to the city, and no party in interest can have any valid complaint with respect to the improvement of the city’s compromise,” Detroit’s attorneys wrote in the brief. “[T]he city respectfully submits that the modifications made pursuant to the [new agreement] substantially improve the benefits that the city is receiving pursuant to the compromise and remove any doubts as to the merits of the motion.”

As part of the agreement, the city will borrow $285 million from Barclays PLC to pay off the banks. That’s down from the original loan of $350 million.

The city’s pension funds have already said they plan to challenge the new deal, saying the terms remains “too rich” for the banks in light of weak legal structure that the funds believe underpin the original swap and collateral agreement.

Attorneys for the funds are expected to file their challenge this week ahead of Friday’s hearing.

It’s unclear whether Syncora and other bond insurers will challenge the new deal. Syncora, the main challenger to the original deal, declined to comment.

Syncora and other challengers did not sign on off the revised swap agreement, according to a transcript of the final mediation session released last week. Chief District Judge Gerald Rosen, who is overseeing the mediation between Detroit and its creditors, noted that not all mediation participants, which included bond insurers and holders of the city’s pension certificates, which are hedged by the swaps, reached agreement.

“We appreciate the spirit in which these mediations were undertaken,” Rosen said, according to the transcript. “That goes for the COP parties that are here and the insurers as well, even though we haven’t yet been able to reach agreement. We understand this has been difficult for everybody and we appreciate it,” the judge said. “I think it’s the first, I think it’s fair to say, significant agreement in the bankruptcy.”

Rosen also notes that Rhodes is not bound by the new settlement. “I think it’s fair to say he’s expressed that he has some reservations about some of the claims and it will be up to him to determine whether or not this is a fair and equitable settlement for the city and for the swap counterparties, but we will make a mediator’s recommendation to that effect,” said Rosen, whose co-mediator on the issue was U.S. Bankruptcy Judge Elizabeth Perris.

Assured Guaranty Municipal Corp. and National Public Finance Guarantee Corp. two weeks ago withdrew their objections to the city’s proposed Barclays loan and the swap settlement.

Attorneys for Detroit’s pension funds now report they will challenge last Tuesday’s settlement between the city and its interest-rate swap counterparties—a settlement projected to save the Motor City $65 million off the costs of terminating the swaps, reducing its costs of borrowing from Barclays down to $285 million pay off the banks. Nonetheless, the city’s unions contend even these terms—still subject to U.S. Bankruptcy Judge Steven Rhodes’ approval―unreasonably favor the counterparties, UBS AG and Bank of America Merrill Lynch Capital Services Inc. However, attorney Robert Gordon told the Bond Buyer: “We will challenge the new deal on the same basis as the old deal…In our opinion, the new deal simply remains too rich relative to our legal arguments that the swap counterparties did not have valid prepetition liens in the casino tax revenues, and, even if they did, those liens do not extend to the post-petition casino tax revenues.” Detroit emergency manager Kevyn Orr is expected to be deposed on the terms of the agreement tomorrow—and the pension funds will file a response before the next bankruptcy court hearing, set for this Friday. It remains uncertain whether bond insurers challenging the original settlement will fight the new one. 

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