Getting to the Checkered Flag. Detroit Emergency Manager Kevyn Orr yesterday urged the city’s unions to reach an agreement on bankruptcy terms soon or risk the loss of millions in funding pledged toward pensions.Speaking at the University of Michigan, after a presentation jointly with Governor Rick Snyder in New York City Monday, Mr. Orr said he hopes to secure enough support “within the next couple of weeks” to achieve a consensual resolution to the Chapter 9 bankruptcy, but warned that time is running out. Telling his audience that Detroit is a city on the verge of a comeback, Mr. Orr, speaking at the Gerald R. Ford School of Public Policy, stressed that a first priority must focus on the provision of adequate services, such as public safety and lighting—all of which, he noted, will require Detroit’s nearly 200,000 creditors to reach consensus on his restructuring or chapter 9 exit plan—telling the audience: “The city’s on the move…It’s got a lot of great things ahead of it.” Mr. Orr also continued to press for resolution of the Detroit Institute of Arts/State bipartisan $815 million plan, noting it still requires buy-in from all parties, warning: “There is a risk. If we don’t get their agreement, some or all of this money will go away.” After his speech, Mr. Orr added that: “The unions have been working very hard and they’ve been working in good faith and hopefully we’re making progress on those issues…What I’m trying to say to them is…we have some time constraints. I’m meeting with them and trying to express my sincere concerns so that we work through these issues as quickly as possible and capture this $815 million for their benefit. It would be a shame if a dime of it went away.” On April 14, the city will ask U.S. Bankruptcy Judge Steven Rhodes to let it seek votes from retirees, bondholders, and other creditors. A key issue, he has made clear, is with regard to his proposed monthly pension cuts of 26% for Detroit’s general retirees and 6% for police and fire retirees, elimination of cost-of-living adjustment increases, and health care cuts. Under the pending plan of adjustment, those pension cuts would rise to 34% and 10%, respectively, if retirees reject what he terms the “grand bargain.” With creditors’ support, he noted, the city’s restructuring could speed quickly through a trial starting July 16, when Judge Rhodes will begin consideration in federal court whether to approve the city’s exit from federal bankruptcy. But without creditors’ support, the city might attempt to implement a forcible restructuring plan in a legal process called a “cram-down.” Mr. Orr yesterday said that in the next few days he expects the city to file an amended disclosure statement that will describe any changes to the restructuring proposal, adding that while he understands the difficulty in considering the city’s proposal, “Reaching a consensual resolution and getting someone to understand they have to give up expectations, particularly those in the twilight of life, is a difficult call.” In noting that yesterday marked the anniversary of his assumption of leadership to address the largest municipal bankruptcy in U.S. history, Mr. Orr added: “I failed to appreciate the grittiness and resilience of Detroit…The people of Detroit are resilient. They love their city and they want to fight for it to come back.” Thus, in his oration yesterday, he said his goal was fourfold: To deliver adequate city services; provide for employee pensions; allow for sustained growth; and secure deals with stakeholders.

Emergency Loan. The city of Detroit took another step on its path to get out of bankruptcy with the unanimous approval yesterday by the Local Emergency Financial Assistance Loan Board of a $120 million loan from Barclays. At a meeting in Lansing, the three-member board quickly approved the loan, which is to be used for infrastructure improvements. The board includes the state treasurer, the director of the Department of Technology, Management, and Budget, and the director of the Department of Licensing and Regulatory Affairs; it had previously been approved a week ago Friday by the Detroit City Council. Now it awaits federal court approval, especially after Judge Rhodes Monday ordered the city to provide more information about it in light of several objections. Governor Snyder yesterday noted: “[I]f it is approved by the bankruptcy court, [it would] provide significant financial resources for the city to invest in restructuring initiatives and help combat blight, improve public safety and enhance the quality of services Detroit residents expect and deserve.” Judge Rhodes has scheduled a hearing for next Wednesday. The money is to be spent on items such as blight removal and improvements to the city’s computer system. As collateral, the Motor City is proposing city income tax revenue. The proposed loan, which is slimmed down from its original $350 million size and uses new collateral, among other changes, still faces legal challenges from a number of major creditors, including a group of European banks, bond insurer Syncora Guarantee Inc., and the city’s two pension funds. In fact, Judge Rhodes, in an order filed late Monday, noted: “Several parties have filed objections to the proposed final order…Having reviewed the objections, the court concludes that its consideration of this matter would be more efficient for all concerned if the city made certain information available.” In his order, which he directed to be complied with by Friday, the federal judge directed the Motor City to provide final copies of all the financing’s documents and all material terms of the loan, including the interest rate, terms , fees, costs, and market flex provisions. He also requested a comparison of the terms of the current deal with the terms of an initial loan that was preliminarily approved by the court in January, and requested that the Motor City detail how it plans to use the loan proceeds with a schedule of the expenditures and budgets.

Can Detroit’s Plan of Adjustment Work? U.S. Bankruptcy Judge Rhodes, seeking, as he must with his rock band to ensure syncopation, Monday also noted he might appoint a municipal finance expert to independently analyze the feasibility of Mr. Orr’s plan of confirmation, noting that the federal court has an obligation to determine whether a Chapter 9 confirmation plan is feasible: “The court finds that this is particularly important in this case, given the purposes of Chapter 9 and the broad reinvestment initiatives the city has included in its proposed plan of adjustment.” Judge Rhodes scheduled a hearing on his draft order for Wednesday next.

Tantamount to Default. S&P yesterday downgraded Detroit’s nearly $5.9 billion of water and sewer bonds, pushing the already junk-rated debt to CCC and warning another one could be on the horizon, with analyst Scott Garrigan noting: “We lowered our rating, because we view the obligations as currently vulnerable to nonpayment…In Standard & Poor’s view, the city’s plan of adjustment indicates that the treatment of the water- and sewer-related debt classes could involve an exchange offer where investors receive less value than the promise of the original securities. We view such an exchange as tantamount to a default.” The S&P announcement adds still another layer of uncertainty to the on-and-off negotiations between the Motor City and its surrounding jurisdictions over the efforts as part of Detroit’s bankruptcy plan to restructure its debt—including through privatization of Detroit Water and Sewerage Department. Firms have until a week from next Monday to respond to the city’s RFP, in the wake of the apparent collapse of negotiations with suburban neighbors to negotiate a new regional authority. As part of the city’s plan of debt adjustment, Mr. Orr has proposed treating the water and sewer bonds as secured debt, but in the plan, he is proposing to restructure the debt to achieve savings, either through a new regional authority or through the state―either of which would require the concurrence of current bondholders.  The Michigan Finance Authority in mid-March put out a request for underwriters for a new $150 million deal in June. The RFP indicated that a restructuring of the entire debt portfolio is a possibility in the context of the city’s bankruptcy. The downgrade comes as Flint and Genesee County in Michigan are bringing $220 million of bonds to market next week to finance their breakaway from the Detroit Water and Sewerage Department and build their own 63-mile pipeline to Lake Huron.

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