03.19.14

Playing for Swaps. Syncora Guarantee Inc. yesterday filed a motion, seeking to have U.S. Bankruptcy Judge Steven Rhodes reject the Motor City’s $85 million agreement with its interest-rate swap counterparties—potentially a breakthrough settlement that could pave the way for Detroit to achieve its goal of getting its plan for debt adjustment approved and to exit municipal bankruptcy sooner than later. Syncora’s challenge is to the only settlement the city has so far made in its Chapter 9 bankruptcy. The new filing came just one day after Monday’s suit filed by bond insurer Financial Guaranty Insurance Corp. in opposition to Detroit’s lawsuit seeking to invalidate the city’s certificates of participation, or COPs. (Under such an arrangement, the insurer [FGIC in this case] wraps a chunk of the pension certificates of participation that the swaps hedge, as well as the swaps themselves. Note: there will be a quiz on this later for readers.) In its filing yesterday, Syncora wrote that the proposed revised settlement is materially different than the previous two the city presented — which the court rejected as too costly — and that the bankruptcy court does not have the power to sign off on key provisions of the deal. According to Syncora, the key difference is that the new settlement leaves out of the deal the service corporations that the city set up in 2005 to issue the $1.5 billion of pension certificates. (Detroit, last January, sued to repudiate the COPs deal, arguing that the service corporations are in fact sham entities.) But Syncora charges that leaving out the service corporations “profoundly” changes the nature of the settlement, noting that it is the service corporations that have the liens on the city’s casino revenues, not the swap counterparties or the city, so they need to be a party to the deal, the insurer says: “Their absence from the agreement, coupled with the contractual provisions of the collateral agreement, means that the new settlement cannot achieve the goal of freeing up the casino revenues.” Syncora also noted in its filing that the deal does not actually terminate the swaps, so that its benefits are not immediately clear. In contrast, Detroit believes the new arrangement is critical to its overall plan of debt adjustment, under which the Motor City would pay the two counterparties, UBS AG and Merrill Lynch Capital Services Inc., $85 million in exchange for access to the casino revenues and the banks’ approval of the debt adjustment plan. Perhaps more importantly, the bank’s approval of the proposed plan would give the city an impaired accepting class: e.g., that would permit Detroit to pursue a cramdown for the rest of its creditors if necessary. Unsurprisingly, Syncora in its filing wrote that the provision, therefore, “does not merely prejudice Syncora — it works an actual alteration to contractual rights Syncora has that cannot be altered without its consent.” Detroit said it would respond to the challenges with its own court filings.

Syncora and Detroit have been locked in battle over the city’s repeated attempts to settle its swaps, which began even before the bankruptcy was filed last July. In its new filing, Syncora claims the revised settlement is materially different than the previous two the city presented – which the court rejected as too costly — and that the bankruptcy court does not have the authority to sign off on key provisions of the deal. The main difference, says Syncora, is that the new settlement leaves out of the agreement the service corporations that issued the pension certificates. (Detroit left them out of the deal in light of the January lawsuit repudiating the COPs.) But, Syncora argues, leaving out the service corporations “profoundly” changes the nature of the settlement, writing that it is the service corporations, not the Motor City, that have the power to grant the counterparties the liens on casino revenues, so they need to be a party to the deal: “Their absence from the agreement, coupled with the contractual provisions of the collateral agreement, means that the new settlement cannot achieve the goal of freeing up the casino revenues.” Moreover, Syncora also notes that the deal does not actually terminate the swaps, so that its benefits are not immediately clear. In contrast, Detroit says the new deal is key to the city’s overall plan of debt adjustment―the deal calls for the Motor City to pay the two counterparties, UBS AG and Merrill Lynch Capital Services Inc., $85 million in exchange for access to the casino revenues and the banks’ approval of the debt adjustment plan.

The Week’s Scorecard (so far…)

FGIC wraps $1.1 billion of the pension COPs. Syncora insures $329 million. Syncora also insures the interest-rate swaps that hedge the certificates. Detroit named the two service corporations set up in 2005 to issue the pension certificates as defendants when it sued to repudiate the pension certificates. FGIC, on Monday, argues that the service corporations, which are made up of city officials, will not adequately protect the insurer’s interest if the issue goes to court, with FGIC claiming that the Motor City’s efforts to repudiate the COPs are “opportunistic and revisionist,” adds: “Courts have not looked favorably on financially troubled municipalities that regret and then seek to unwind past promises, years after such promises were lawfully made, and with the knowledge that innocent third parties have relied to their detriment on such promises.” Proceeds from the 2005 COPs deal funded the city’s two pension systems. On Tuesday, Syncora files. On Tuesday, Detroit issues notice it will file.

What’s it all about, Alfie?

Probably no one has been more acutely conscious that each day spent in court and in negotiations imposes a toll on the bankrupt Motor City than Judge Rhodes: it marks funds the city does not have being spent – not for a sustainable future for Detroit – but rather fighting over scraps, or, as one writer noted yesterday: “A pair of bond insurers filed lawsuits challenging key aspects of Detroit’s bankruptcy plans, litigation that could derail the city’s effort to exit Chapter 9 by the fall…” This week’s litigation comes at an important time in this historic bankruptcy case—as the Motor City is seeking to gain enough votes from its 170,000 creditors to gain U.S. Bankruptcy Judge Steven Rhodes’ approval of the Motor City’s plan of debt adjustment, likely hoping to be able to impose a “cramdown” plan for dissenting creditors. With Judge Rhodes already having agreed to delay the trial until this July—and the looming appeal of Judge Rhodes’ own decision finding Detroit eligible for federal bankruptcy in the 6th U.S. Circuit Court of Appeals, the meter is running. In effect, every day the meter runs, the resources critical for Detroit’s potential future is the lesser. Now, this week’s new litigation could significantly set back Judge Rhodes’ fast-track schedule; it could significantly delay the plan confirmation hearing schedule. It will adversely affect Detroit’s future.

Moody’s has determined that investors holding Jefferson County’s general obligation limited tax warrants fared better than the rating agency had anticipated in the wake of the Alabama county’s successful exit from municipal bankruptcy. In its update yesterday, the rating agency reported that wide dispersion of recoveries for Jefferson County’s creditors within the same security class continues a trend occurring in other municipal bankruptcies and restructurings, including Harrisburg, Pa., Detroit, and Stockton. Jefferson County exited Chapter 9 bankruptcy early last December after substantial implementation of its plan of adjustment, where the key to its exit was the sale of $1.8 billion of sewer refunding warrants to pay creditors holding $3.14 billion in sewer debt. According to the report, Jefferson County creditors holding GO debt realized recovery rates that ranged from 88% to 95%, with analyst Christopher Coviello writing: “The overall GO recovery rate is much higher than the overall recovery rate of 54% realized by Jefferson County sewer warrant creditors, and slightly higher than our previous expectations.” A GO interest rate swap that recovered nothing was also included in the overall recovery rate, because it was on parity with the GOLT (general obligation limited tax) warrants. That swap had been terminated by JPMorgan on Sept. 4, 2008 with a cost to Jefferson County of a $7.9 million termination fee, plus $1.8 million in accrued interest until the county exited bankruptcy. JPMorgan accepted $10 as a recovery for the swap in an agreement with the county. Mr. Coviello noted: “GOLT creditors realized higher recoveries than sewer creditors, because Jefferson County’s sewer system was far more overleveraged prior to the bankruptcy, relative to its ability to pay…Jefferson County’s general financial operations should be able to sustain the adjusted GOLT debt service schedule going forward….Conversely, the amount of sewer debt remains burdensome for the sewer system even after being cut,” so that, he warned, “Jefferson County’s ability to repay its post-bankruptcy sewer debt rests heavily on its ability to implement large future rate increases.”

Is the Spring Sprung? Springfield, Florida Mayor Ralph Hammond reports his city of 9,000 is in a state of financial emergency. The city has faltered on debt payments on a state-funded sewer project under a 30-year payment plan expected to mature in 2026. The project introduced a public sewage system to Springfield residents in 1996. Every six months, the city is supposed to cut a check for about $92,000 to the state but deferred the October bill due to a lack of funds. “We basically deferred on the principal payment and paid the interest,” Hammond said. Suggesting that imposing property taxes may be the only way out, Mayor Hammond has written Governor Rick Scott and the Florida Legislative Audit Committee Wednesday to declare a financial emergency. Currently the small municipality pays about $400,000 a month in bills, but they have been unable to make consistent payments each month; indeed, the city owes hundreds of thousands of dollars, including a big portion to Bay County for the Advanced Wastewater Treatment facility and water usage. In his letter to the Governor, Mayor Hammond wrote that the city meets two conditions under Florida law which defines an emergency.

(a) Failure within the same fiscal year in which due to pay short-term loans of failure to make bond debt service or other long-term debt payments when due, as a result of a lack of funds. (The first relates to the city deferring a state loan payment for a water sewage project that dates back to 1997. The city also failed to pay two cable bills within 90 days.)

(b) Failure to pay uncontested claims within 90 days after claim is presented, as a result of funds.

State officials have requested that the mayor and his staff answer several questions about the city’s finances by March 28th.  Once the city answers the questions, the state will determine if Springfield will need financial assistance. For his part, Mayor Hammond believes part of the problem comes from a former financial director using city credit cards for personal purchases, but also advises that the municipality’s low water and sewage rates contributed to the financial bind. Last year, city commissioners approved a rate increase, but are also considering an ad valorem tax to catch up on the bills. As it is, the City Commission will meet Monday to discuss creating its first-ever property tax; Springfield currently is funded mainly through utility charges and grants.

 

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