02.04.14

The Checkered Flag?  The Motor City expects to submit its plan of adjustment next week to the U.S. Bankruptcy Court, outlining its plan of its proposed treatment or haircuts of its more than 100,000 creditors who are owed more than $18 billion of debt.  Bill Nowling, spokesperson for Detroit emergency manager Kevyn Orr, yesterday said: “We will file with or without resolution on some of the outstanding issues, like what will happen to DWSD (Detroit Water and Sewer Department),” where negotiations over Mr. Orr’s proposed $1.9 billion plan to lease the system to a new regional authority for 40 years has stalled amid negotiations with counties that are reluctant to take on the additional debt without financial disclosure documents from Detroit. The final plan will fill in the blanks of the 99-page draft plan provided to the city’s creditors two weeks ago, but which proposed the Motor City’s retirees would receive roughly 10 cents on the dollar more than holders of Detroit’s general obligation bonds. Once submitted to the federal court, the creditors will vote on the plan—with the Motor City needing to attain a vote from the city’s creditors who make up or hold two-thirds of the Amount of debt and who represent or make up more than half the city’s 100,000+ creditors—with the vote to be taken after the plan’s submission to the court. Should the city achieve that double threshold, and should U.S. Bankruptcy Judge Steven Rhodes approve the plan, the remaining creditors would likely be subject to a cram down or an involuntary imposition by the U.S. bankruptcy court of Detroit’s reorganization plan over the objection of some classes of creditors. Nevertheless, key components of the plan remain unsettled—especially the proposed lease agreement of the Detroit Water & Sewer system, with Oakland County Executive Brooks Patterson Wednesday, in his annual state of the county address, stating: “The system is suffering from decades of neglect and will require billions in maintenance and EPA compliance costs…As payers in this system, who have had nothing to do with the corruption and organization of failures … we are still going to be the ones held responsible to pay for the repairs for the infrastructure…In other words, that’s a long way of saying your rates are going to go up.” But if the proposed regional lease goes up in flames, Detroit risks its hopes to not only refinance $5.9 billion of outstanding revenue bonds to gain significant savings, but also, and mayhap more crucially, $47 million annually from the proposed 40-year lease.

A New Motor City? If and when U.S. Bankruptcy Judge Steven Rhodes approves Detroit’s plan of adjustment, the largest municipal bankruptcy in U.S. history will be over. But for Detroit, the challenges will just be beginning. While the city will have erased much of its overwhelming debt, it will still confront unsurpassed violent crime and child mortality rates, the task of operating with a depleted population, but one of the largest land areas to govern, police, and operate of any city in the U.S., and a federally approved court order of creditors to be paid. The twin of the municipal bankruptcy approval of debt relief, then, will have to be a partner with a plan to reverse the steep economic and population decline of the last quarter century that has emptied such large expanses of the Motor City. Detroit Mayor Mike Duggan, in one of his first appointments as the city’s new mayor, created a new post: a jobs and economy czar, which, Mayor Duggan describes as a responsibility for “creating jobs for Detroiters” and landing development deals. To fill that critical and relatively unique role, Mayor Duggan selected Tom Lewand has the worst job in Detroit — or the best. Mr. Lewand, who has already met with representatives of 25 banks, investment funds and real estate investment trusts looking for new opportunities to reallocate their capital to boost returns, says: “I think I have the best job in America right now because we have so much opportunity in Detroit…What I see is tremendous opportunity for access to capital. Now, is that capital going to be affordable? I have to figure that out.” Part of the task is changing the way the city works—pressing to deliver on Mayor Duggan’s promise of a one-stop shop for business permitting. He says community development financial institutions from around the country are looking for ways into Detroit. They use tax credits, foundation dollars and bank lending to build affordable market-rate housing, develop small businesses and support general economic development efforts.

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