04.09.14

One More Lap. The Detroit Free Press earlier this morning reported that Detroit could today announce it has reached a bankruptcy settlement with its unsecured bondholders. If so, the announcement would reflect a critical breakthrough, and it could become the proverbial straw to break the camel’s back—creating a significant incentive for others of the city’s tens of thousands of creditors to work out a deal with the city, rather than cross their fingers in hopes of a potentially favorable ruling by U.S. Bankruptcy Judge Steven Rhodes.  Perhaps more importantly, the potential agreement would create a triple benefit: it would make it more likely that others of the Motor City’s creditors would want to cut a deal; it would save legal costs for the city; and it would mean the city would have more resources both to pay other creditors and—importantly—to invest in the city’s future sustainability. As a bonus, it would likely improve the musical mood of Judge Rhodes, who had urged unsecured bondholders and the city to reach a settlement, noting his preference for an agreement between the parties, rather than forcing him to be Solomon and issue a judicial decision. The pressure on other creditors, moreover, could add momentum for the Motor City to pursue a forcible restructuring plan through a so-called cram down: it would mark a key second step, as Motown emergency manager Kevyn Orr has already reached an agreement with UBS and Bank of America Merrill Lynch to support the Motor City’s plan of adjustment, in return for his approval of the $85-million swaps settlement with the banks over an unrelated pension debt interest-rate transaction.  In its disclosure, Detroit notes some $538.2 million in municipal bonds it considers unsecured — including $163.5 million in limited-tax obligations and $374.7 million in unlimited-tax obligations.

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