03.31.14

One More Lap.  Despite still another Polar Vortex visit to the Motor City, this will be a frantic week in U.S. Bankruptcy Judge Steven Rhodes’s courthouse: The Motor City intends to file a new or revised plan of adjustment and disclosure statement today in an effort to address a number of complaints from some of its 100,000+ creditors of insufficient information, promising it will provide updated agreements as a result of ongoing negotiations; Judge Rhodes also agreed on Friday that he would make a decision Wednesday in response to a request from some of Detroit’s creditors for a delay in the SWAPs hearing scheduled for Thursday; Detroit Emergency Manager Kevyn Orr is scheduled to be deposed today;  and Judge Rhodes will now have to deal with Syncora’s request Friday to subpoena to the Detroit Institute of Art (DIA), as well as Christie’s auction house, and the State of Michigan for dozens of documents—with Syncora and others of the city’s creditors claiming the art collection may be worth far more that Christie’s has estimated.  Finally (tired yet?), Judge Rhodes will also hear a dispute on Detroit’s debtor-in-possession or proposed $120 million DIP loan with Barclays at the Wednesday hearing.

The Art of Municipal Bankruptcy. Syncora’s  subpoenas of the State and DIA mark part of its challenge to the unprecedented state/public-private effort to both protect the city’s world class art collection, but also leverage the bipartisan, bicameral state and DIA public-private proposal to leverage $850 million for Detroit’s unfunded pensions, as well as preservation of its priceless, municipally-owned art collection. The deal, largely the artistic creation of Chief U.S. Judge Gerald Rosen, calls for $350 million in private donations, $350 million in state funding, and $100 million from the DIA—pledges which would only be redeemed if the funds were sole devoted to addressing the Motor City’s unfunded pension liability—especially for those retirees who otherwise might be forced into poverty. Syncora and other creditors’ claim both that the art collection may be worth much more than Christie’s has estimated, but mayhap more critically, that any such funds should not be restricted to solely the retiree creditors. Syncora has requested 80 documents, many of which have several subcategories of additional requests, from the three parties that date back to 1883 (yes: 1883), including all inventories created in the past five years of the works and objects in the museum’s collection; provenance listings for every piece; all communications the city has had with investors, collectors or other individuals about the pieces; the museum’s attendance numbers; and all documents related to Christie’s valuation. Syncora is seeking from the State of Michigan documents related to its analysis of the city; documents related to creditor recoveries outside of Chapter 9; all communications related to the service corporations set up in 2005 to issue $1.5 billion of pension certificates; and all documents relating to the city’s revenue-sharing arrangement with the state.

Swapping. Judge Rhodes on Friday agreed to consider a separate Syncora request that he decide Wednesday whether to delay Thursday’s scheduled hearing on the Motor City’s interest-rate swaps settlement (the proposed swaps settlement calls for Detroit to pay its two counterparties $85 million after the bankruptcy closes to terminate the contracts, which would be a 70% discount off of the current termination price tag, according to the banks and the city.). With a hearing on Detroit’s plan of debt adjustment scheduled for two weeks from today, creditors argued that the swaps settlement hearing should be scheduled for around the same time. The swaps settlement calls for Detroit to pay its two counterparties $85 million after the bankruptcy closes to terminate the contracts. That would constitute a 70% discount from the current termination price tag, according to the banks and the city. Syncora claimed the current schedule gives objectors only seven days to review the changes to the swaps settlement that the city released last week; they also told the court additional would be important in order to review the deposition of Detroit emergency manager Kevyn Orr, scheduled for today.

Dipping. At the DIP hearing―where, at Judge Rhodes’ orders, Detroit is to disclose the details of its proposed settlement (the details of which the Motor City released Friday), Barclay’s is expected to challenge that the Motor City’s proposed agreement is materially different from one which Judge Rhodes conditionally approved last January―a claim which the Motor City termed a “faulty premise” that would necessitate still another “round of expensive discovery, more delay and additional days of contested evidentiary hearings.” The major difference between current proposed DIP loan versus Detroit’s original proposed $350 million loan, besides the smaller size, is the newly proposed collateral to back it: Detroit is now pledging its municipal income tax revenue instead of its gambling taxes—a change that comes in the wake of a warning by Judge Rhodes last January that the city needed to be careful about gambling with using its casino revenue as collateral. Under the proposed terms, the interest rate would remain the same: the city will pay an interest rate based on the London Interbank Offered Rate plus 3.5%, with 3% market flex built in. The bank is proposing to resell the debt, when and if the agreement is approved and closes. The debt matures either when a debt plan of adjustment is approved by the court or 2.5 years after the closing. Similar to the original proposed agreement, this one incorporates a long list of default triggers, but unlike the earlier proposed agreement, the Motor City has agreed to reimburse Barclays for all legal fees and expenses if the loan is not closed by the auspicious day of April 15th. Finally, as directed by Judge Rhodes, Detroit’s filing includes a detailed list of the use of the proceeds as ordered by the federal court: The Motor City proposes to spend $36.2 million on the police department; $36 million on blight removal; $28 million on the fire department; $25 million to upgrade finance department information technology and hire staff; and other various service upgrades.

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