01.02.14

Mayor Mike Duggan was officially sworn in yesterday as the Motor City’s 75th mayor, telling the citizens; “My goal is to move this city back to elected leadership Oct. 1…Everything I’ll be doing with the City Council and with the elected police commission is going to be geared toward returning us to elected leadership Oct. 1.” Because Mayor Duggan is unlike any other newly elected municipal leader in America: his authority is almost entirely state-preempted, with the Motor City under the state-appointed Emergency Manager, Kevyn Orr. Nevertheless, in his inaugural address, Mayor Duggan promised: “I’ll be dealing with things like getting the buses running and the snow plowed and those kind of day-to-day things that people in Detroit deserve…At the moment, we have a division of responsibilities that I respect. I’m not going to spend any time complaining about it. I’m going to do the best job I can on the areas I’m responsible for. I’m hopeful the plan will work out,” vowing that in the first 100 days residents can expect him to begin work quickly on a public lighting plan and a blight authority: “We’re going spend a lot of time doing what the people expect me to do, working on the nuts and bolts of city government.” Mayor Duggan, under the power sharing agreement he worked out with Mr. Orr, will be responsible for most of the city’s day-to-day operations; Emergency Manager Orr will maintain authority over financial matters related to the city’s bankruptcy restructuring and supervise the Police Department; Mayor Duggan will oversee other operations, including the Fire Department, blight removal and lighting. Another and key provision of the two leaders’ power sharing agreement is that Mayor Duggan has agreed not to undercut Mr. Orr’s plan of adjustment to cut debt in bankruptcy court. In contrast, Mr. will have veto power over some mayoral decisions, including department restructurings, outsourcing of city services and infrastructure investments exceeding $50,000, as well as hiring and firing of full-time employees earning more than $50,000 a year. The New Year also marked the inauguration of a new City Council, with seven of the nine members elected in districts for the first time in nearly a century and five new members. The council is scheduled to elect a president on Monday.

Racing to the Appeals. U.S. Bankruptcy Judge Steven Rhodes has scheduled a hearing for tomorrow on the Motor City’s revised, Christmas Eve settlement with its interest-rate swap counterparties, which 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, or about a 62% payout on the face value of the swaps compared to 75% in the original swap settlement. Under the terms of the new settlement, Detroit and the banks are barred from terminating the swaps before Jan. 31st. 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 deadline is intended to provide time for the respective sides to obtain a final determination from the bankruptcy court. In addition, the banks have also agreed to release all money from accounts that hold back a piece of the casino revenue as collateral. (The settlement is 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.) 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., noting that, in their 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. But Detroit’s two public unions intend to challenge the agreement, arguing the terms remain “too rich” for the banks in light of weak legal structure that the funds believe underpin the original swap and collateral agreement; it is uncertain whether Syncora and other bond insurers will challenge—but, according to the transcript of the mediation session before Chief U.S. District Court Judge Gerald Rosen, Syncora and other challengers did not sign on off the revised swap agreement, with Judge Rosen noting: “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.”

U.S. District Court Chief Judge Gerald Rosen, who could not have enjoyed much of a holiday, has ordered Detroit to disclose the details of what might be the lynchpin of Emergency Manager Kevyn Orr’s recovery plan, the restructuring of the Motor City’s water and sewer authority, to major financial creditors by today, in order for them to have an opportunity to analyze the proposal before a mandatory mediation session Monday and Tuesday in New York City. The plan would spin off the department into an independent authority that would make lease payments to the city, which would retain ownership of the assets. The authority would assume responsibility for infrastructure upgrades and restructuring the department’s bureaucracy. With extra cash flow from the deal — potentially worth billions over the next several decades — the city could reinvest in services, such as improved police and fire protection. The innovative proposal, however, has created concerns for bondholders who own the Detroit Water and Sewerage Department’s secured debt, which totals about $6 billion. They are entitled to 100% payment, and Orr has signaled plans to give them everything they’re owed. Still, some bondholders consider a restructuring of the secured bonds to be an event of default, even if they get paid in full. Judge Gerald Rosen Tuesday ordered the city to meet with bondholders over its planned treatment of its unlimited-tax general obligation bonds, limited-tax GO bonds, and nearly $6 billion of water and sewer debt, ordered the city to tell bondholders how it plans to treat the water and sewer debt by tomorrow, ahead of the formal mediation. The water and sewer debt is considered among the safest of Detroit’s bonds, with emergency manager Kevyn Orr treating it as secured under his original proposal for creditors. The Emergency Manager has been negotiating with suburban officials to create a new bond-issuing authority that would lease the systems, which are among the Motor City’s most valuable assets. Under the terms, Detroit would receive regular payments from system revenue. By today, the Motor City is to provide the bondholders with a written summary of the potential treatment of the water and sewer bonds under various proposals such as a long-term lease, according to Judge Rosen’s order―the summary should include the amount the city expects to receive if the Detroit Water and Sewer Department is sold, leased, or transferred to a new entity, and the Motor City is directed to report to bondholders how the bond payments will be treated relative to the privatization plan—as well as addressing the amount of legacy pension, other post-employment benefits, and certificates of participation liabilities that the city intends to assess to the water and sewer department. In his written order, Judge Rosen directed Detroit  city to provide the amount it expects to receive if the water and sewer “systems are leased, sold, or transferred, including a summary of how those amounts will be paid and how the payments will be treated relative to the bond payments.” In addition, the Judge directed the city to disclose the payment terms and the amount of pension obligations, retiree health care, and pension obligation certificates of participation the city expects to assign to the water and sewer department after the city exits Chapter 9 bankruptcy.

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