03.07.14

Another Lap. U.S. Bankruptcy Judge Steven Rhodes yesterday affirmed a July 16 trial date to consider the Motor City’s plan of adjustment to determine whether to approve the city’s proposed plan of adjustment allocating its debts amongst its 170,000 creditors. Under his order, the judge scheduled additional trial dates for July 17-18, July 21-25, July 28-31, and Aug. 1st. The revised schedule means that the city’s creditors will have the months of May and June to vote over whether or not to approve Kevyn Orr’s proposed plan of adjustment—a plan which not only includes a number of blank spaces to be filled, but also remains subject to ongoing negotiations. In addition, nearly 90 Detroit retirees yesterday filed objections with the court—some handwritten—urging Judge Rhodes to reject the proposed cuts in retiree pensions and health care benefits. While the plan—provided the as yet incomplete Detroit Institute of Arts/Gov. Rick Snyder bipartisan $815 million package is worked out—proposes a 26 percent cut for general retirees, 4 percent for police and fire retirees—provided the two independent pension boards agree to back the plan and the associated $815 million in aid pledged by the state and private donors in exchange for divesting the Detroit Institute of Arts so that it could not be sold by the city as part of any debt adjustment measure. In addition, the city’s plan proposes to put approximately $400 million into a trust over 20 years to provide health care for current and future city retirees and dependents—including the creation of a health-care trust overseen by a board of trustees—in the wake of its recent agreement with the retiree committee set up under Judge Rhodes auspices. The plan calls for the elimination of city-sponsored insurance, shifting Motor City retirees onto Medicare or private plans sold on the federal insurance marketplace. One of the handwritten notes submitted to Judge Rhodes yesterday by Oak Park resident Phyllis Fuller provides a sense of the quiet fear of retirees. Ms. Fuller, whose career in the Motor City spanned 35 years, wrote: “I never thought I would have to write a letter to a bankruptcy judge and beg to keep my pension…Thank you for considering the hardships the City of Detroit bankruptcy will cause me and the other retirees.”

New Motor City Loan. Detroit yesterday sought approval in federal bankruptcy court of a $120 million loan from Barclay’s to finance improvements to city services. The so-called debtor-in-possession or DIP loan is to be backed by income tax revenue and up to $10 million in collateral from the sale or “monetization” of unnamed city assets―although the proposed loan agreement “expressly excludes” any city-owned art at the Detroit Institute of Arts. Under the revised terms, the loan would not be used to pay off pension debt, but rather the proceeds would be dedicated to upgrading city computer system and buying new equipment for the police, fire, and emergency medical services departments—with Barclays imposing a of 3.5% plus a market-based flexible rate that would cap total interest payments at 6.5%, according to the city, with the term of the new loan ending on the day Detroit exits bankruptcy―which would require the city to secure “bridge financing” to service the new debt or earmark certain revenues for repayment of the balance. The proposed agreement came in the wake of weeks of negotiations with Barclays to revise terms of an original $350 million DIP financing announced last October, with the most significant change relating to the backing for the loan: the new proposal drops a pledge of Detroit’s casino revenues and substitutes a pledge of Detroit’s income taxes and asset proceeds as collateral, albeit that pledge specifically excludes the city owned Detroit Institute of Arts’ art collection or the city’s water and sewer system—with asset proceeds defined as any net proceeds generated from a sale or privatization of any city-owned asset for over $10 million. Under the proposed terms, the bank would be given a super-priority claim above all other claims—although the city told the court yesterday that the super-priority claim may not include proceeds from a property tax millage dedicated to the Motor City’s unlimited-tax general obligation bonds, if the court finds that the GO bondholders are allowed that money or that the city cannot use the money for any other reason than for payment on the GO bonds—an issue over which Detroit is currently contesting with its bond insurers.  Under the proposed terms of the loan, it would mature in two and a half years after the closing date, when the city’s debt adjustment plan is confirmed by the bankruptcy court, or when the case is dismissed, whenever is earliest. The Motor City promised it would produce a schedule setting out how it plans to spend the proceeds from the loan. Judge Rhodes had previously rejected two earlier, similar proposals to borrow $350 million and then $285 million in order to use a large portion to pay off a troubled pension-related debt. Last time, the agreement would have required the city to pay Barclays half of its $4.4 million loan processing fee up front; under yesterday’s proposal, Barclays has agreed to cut that fee by $1 million, according to said Bill Nowling, spokesperson for Emergency Manager Kevyn Orr.

SWAP Agreement. In another abnormally busy day in the federal courthouse, U.S. Bankruptcy Judge Steven Rhodes yesterday also heard a request from Detroit to schedule a trial for the first day of spring, March 20th, on its proposed settlement with its interest-rate swap counterparties—a request which Judge Rhodes indicated he would entertain. Explaining the urgency of the Motor City’s request, Detroit attorney Robert Hertzberg testified that the settlement is key to Detroit’s plan of debt adjustment. Under the proposed terms, the Motor City would pay its two swap counterparties, UBS AG and Merrill Lynch Capital Services Inc., $85 million in exchange for access to casino revenues and the banks’ approval of the debt adjustment plan. In response, Judge Rhodes yesterday queried whether Syncora Guarantee, Inc., the bond insurer that wraps (not raps) a chunk of the swaps, would challenge the proposed agreement—which is now in its third appearance before his court, in the wake of opposition to two earlier proposals. In response, Syncora’s attorney replied: “I think there is a likelihood there may be an objection…We have serious concerns.” Agreement would be another key element of the city’s efforts to exit municipal bankruptcy, as the bank’s approval of the plan would garner an impaired accepting class, which, in turn, would provide leverage by allowing it to pursue a cramdown plan for the rest of its creditors if necessary, leading the city’s attorney to tell Judge Rhodes: “It drives the plan…I believe the court will approve it, but, if for some reason it didn’t, we need to find out what the alternatives are and we need to know now.”

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