01.08.14

Racing to the Finish Line. Under orders from Chief U.S. District Judge Gerald Rosen, the lead mediator appointed by U.S. Bankruptcy Judge Steven Rhodes in Detroit’s bankruptcy, Motor City negotiators have been locked (more likely nearly frozen) in negotiations this week in New York City behind closed doors in an intense effort to attempt to reach an agreement with creditors on a plan of adjustment which would permit Detroit, if U.S. Bankruptcy Judge Steven Rhodes were to approve, a blueprint or plan of adjustment for exiting bankruptcy. Not only is this the target week Emergency Manager Kevyn Orr had set as his deadline for reaching an agreement that the federal court might approve as the fairest way to address the city’s more than 100,000 creditors to restructure the city’s $18 billion in debts and to secure a sustainable future, but also all hands will need to be on deck next week for the Motor City’s North American International Auto Show, which commences Monday. Fabulous Matt Fabian, the Managing Director of Municipal Market Advisors perhaps put it most concisely, referring to the willingness of some of the Motor City’s largest creditors to be willing to compromise: “I would think ‘some’ pushback is wildly understating the pushback…In talking to these guys, there is absolutely no interest in settling anything…Their resistance could be formidable if the city is insistent on reducing their full recovery.” Giving another perspective, Bill Nowling, Mr. Orr’s spokesperson, described the negotiations this week as “three dimensional chess,” with each of the city’s creditors intent on fighting to oppose any outcome under which it might take less. Key players include not just the city’s unions and retirees, but also the city’s bond insurers, water and sewer bondholders, and other governments in the greater Detroit metropolitan region. Not at the table, of course, are Detroit’s citizens, employees, or taxpayers. Moreover, the shadow—or mayhap better stated—the effluent of Jefferson County is also affecting this week’s frigid negotiations. Now, the issuers of $6 billion in water and sewer bonds, which were believed to be the safest Detroit debt to own, are reportedly pushing back against Mr. Orr’s proposal to spin off the Detroit Water and Sewerage Department and make it a metropolitan authority. Such a plan could allow the Motor City water department to refinance billions in bonds—an arrangement under which the city could realize significant savings by realizing significantly lower borrowing costs. Unsurprisingly, bondholders of that debt are unwilling to accept lower interest rates, and, as Mr. Fabian notes, “The bondholders are worried about a repeat of Jefferson County,” where the county recently resolved its municipal bankruptcy by paying sewer bondholders 80 cents on the dollar. And not just bondholders: elected leaders in the Detroit metropolitan region, not to mention water and sewer customers, are less than enthusiastic about the Emergency manager’s proposal to squeeze $9 billion in lease payments out of the water department’s facilities over the next four decades.

 

State of the City. Motor City Mayor Mike Duggan yesterday delivered his inaugural address after being sworn into office by U.S. 6th Circuit Appeals Judge Damon Keith, a legendary civil rights figure, who told the audience that while Mayor Duggan is white, he was elected by a city that’s more than 80% African American, proving Detroiters “can do the right thing, based on character, integrity, and competence. That’s what this election means to all of us, and we’re counting on you, buddy.” In his first address as the city’s elected leader, Mayor Duggan urged his citizens considering moving out of the city to hold off for six months to give him, his administration, and the new City Council a chance to demonstrate measurable improvements in quality of life: “Maybe your neighborhood’s run down, you’re in a house, and you’re thinking you’re going to just walk away from it, it’s a lost cause, like so many before you have: I say to you one thing: Just give us six months. Give us six months to prove that we can turn things around. Just push the pause button and don’t leave that house yet…Give us six months before you walk away from the value of that house. Give us six months and let us prove to you what we can do.” The Mayor warned there will be no overnight cure for the city’s decades of distress, poor city services, and blight. But he pledged quick action to jump start streetlight repairs, to improve the Motor City’s substandard bus service, and better-coordinated blight removal to speed up tearing down of vacant, deteriorated homes and businesses. He stated his administration will be judged and will judge itself on whether Detroit not only stems its historic population loss, but actually begins attracting more residents by 2017, so that: “six months from now you’re going to be able to judge for yourself whether the leadership of this city has a sound plan and is achieving it.” With regard to the transition back to local control, Mayor Duggan said that while he remains philosophically opposed to state intervention, he has become convinced that Emergency Manager Orr wants to end his tenure in September and return Detroit back to local control. Yesterday’s inaugural came a day after the City Council, elected by district for the first time in nearly a century, elected councilmember Brenda Jones as president and George Cushingberry, Jr. as president pro tem. Ms. Jones has been among the council’s most vehement critics of Emergency Manager Orr.

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