02.19.14

Running out of time. With the Motor City potentially filing its proposed plan of adjustment to exit the country’s largest municipal bankruptcy in the nation’s history today in his federal court today, the leader of the Motown musical group, the Indubitable Equivalents, U.S. Bankruptcy Judge Steven Rhodes will have a long day—with bond insurers appearing with the city at 10 this a.m. to challenge Detroit’s proposal to:

  • declare some of its general obligation bonds as unsecured debt (please see below),
    • consider the Motor City’s request to disband a committee of unsecured creditors that the city argues is no longer necessary, claiming all major creditor groups are adequately represented in some capacity in the case,
    • consider a request by the city’s retiree committee to purchase insurance to protect committee board members against lawsuits, and to
    • hear arguments with regard to bond insurer Syncora’s dispute with two banks that own Detroit swaps.

Getting Ready to Rumble.  Gary Brown, Detroit’s COO, yesterday, responding to a question from the Detroit City Council about whether Kevyn Orr’s plan of adjustment for the Motor City would include a $120 million “quality of life” fund for the future sustainability of Detroit—instead of just the plan of adjustments in payments to each of the city’s more than 100,000 creditors, indicated the Motor City may file its plan of adjustment with U.S. Bankruptcy Judge Steven Rhodes today, although he subsequently advised the Council that was what he hoped. He did respond to Detroit City Council President Brenda Jones: “I can assure you that when we see the plan of adjustment tomorrow that those dollars are fairly well allocated to the main quality of life issues that we have in the city.” Subsequently, the spokesperson for Emergency Manager Kevyn Orr reiterated: “The official statement out of the emergency’s manager is it will be filed this week….We’ve said that consistently, and we’re sticking to it…I’m hoping that it’s coming tomorrow, but I’m not writing it.”

Bond, not James. Whether the Motor City files its plan of adjustment with the U.S. Bankruptcy Court in Detroit or not today, it will be in Judge Rhodes’ courtroom to defend its position that some of its general obligation bonds are unsecured debt, so that its pledge of its tax revenue to pay off the voter-approved bond issues is not a binding obligation, as required under Michigan law, as argued by bond insurers in two lawsuits, but merely a promise. Thus, in its plan, the City has proposed classifying general obligation bondholders, as opposed to secured muni bondholders, as unsecured creditors, including owners of debt paid with taxes that were approved by voters for various infrastructure projects. That means, for instance, the city proposes to treat water and sewer bondholders as secured and likely to be paid in full under the adjustment plan it will file with the court as early as today. But Ambac Assurance and National Public Finance Guarantee Corp. will argue in less than three hours that Detroit must pay up—as required by Michigan law.

Is There Life after Municipal Bankruptcy? U.S. Bankruptcy Judge Thomas Bennett approved Jefferson County, Alabama’s exit from what was—at the time—the nation’s largest ever $4.23 billion municipal bankruptcy in his courtroom just after 4 p.m. last November 21st. Yesterday, Moody’s upgraded the County’s credit rating from Caa3 to Ba3 on the county’s general obligation limited tax debt and to Ba3 from Caa3 on its outstanding issuer rating. In effect incorporating the rating agency’s assessment of Jefferson County’s  implied unlimited general obligation pledge—and reflecting the county’s exit from Chapter 9 municipal bankruptcy, with the upgrades acknowledging the substantial structural improvements that the county has made in terms of its debt and operating cost structure, the restoration of financial reserves, and the relative strengths of its  economic base.

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