06.16.14

Progress! In the wake of U.S. Bankruptcy Judge Steven Rhode’s order late last Thursday for Detroit to go back into mediation with its limited-tax general obligation bond holders  (Compared with unlimited-tax general obligations bonds, limited-tax municipal bonds are not usually backed by a specific tax-revenue stream—explaining why the Motor City had argued it could offer a much lower payout to those bondholders in municipal bankruptcy; nevertheless, these bondholders opposed the cut as unfair―and warned that deep cuts could adversely impact costs to other cities and counties in the state, potentially driving up their costs of borrowing.),  mediators late Friday announced a settlement on the treatment of Detroit’s limited tax general obligation bonds that “recognizes” their unique status in the municipal market. According to the statement, details of the settlement are in the “final documentation process, with the settlement recognizing “the unique status and niche of LTGOs in the municipal finance market. The insurer of the LTGOs has made clear it will honor its insurance commitments on the existing policies.” Under the Emergency Manager’s original plan of adjustment, unlimited-tax general obligation bondholders who reached an agreement with the city in April are to receive about 74 cents on the dollar in recovery on their claim under the plan, but that plan had proposed between 10-13 cents on the dollar to limited tax general obligation bondholders. The mediators achieved the settlement in negotiations between Detroit and the two principal LTGO creditors, Blackrock Financial Management and Ambac Assurance Corp. (Ambac insures about $93 million of the $163 million of Detroit LTGOs that are not secured by a lien on state aid.) Despite the small size of the debt relative to the Detroit bankruptcy case, the stakes are considered high for the insurer because the final treatment, determined either in a settlement or a ruling, could serve as an influential example for future recoveries. In the statement released by the mediators, they reported: “With this settlement, only a few remaining, albeit significant, disputes remain to be addressed between the city and its creditors prior to the bankruptcy’s court scheduled hearing on the city’s plan of adjustment (set to commence next month)…The mediators pledge to re-double their efforts to resolve those remaining issues and reach meaningful agreements between the city and remaining creditors.” The so-called LTGO creditors were among a few remaining major financial creditors not to reach a settlement with the Motor City—which had offered 10-13 cents on the dollar, compared to the 74 cents on the dollar settlement reached with the city’s three insurers who wrap Detroit’s unlimited-tax GO bonds. The resolution crossed off another of the 14 legal issues Judge Rhodes had requested attorneys to prepare briefs for the court for future hearings, posing the issue here as; whether the “failure of the plan to treat LTGO claims as senior unsecured claims violates the bankruptcy code, Michigan law, or a contract right that is enforceable in bankruptcy.” Ambac, in its statement released Friday, noted: “Given Detroit’s unique circumstances, Ambac has accepted a settlement with the City for the limited tax general obligation bonds…Ambac’s net par exposure related to Detroit’s limited tax general obligation bonds was $92.7 million as of March 31, 2014. We expect to continue to pay claims of scheduled principal and interest on the bonds insured by Ambac.” According to the latest version of the city’s debt-cutting plan filed in April, the city of Detroit owed about $547 million in principal and interest on these LTGO bonds. It was unclear on Friday whether the agreement would boost the recovery for these bondholders and by how much.

Peace. In a separate announcement, the federal bankruptcy court late Friday announced the Motor City and AFSCME Council 25 had reached a series of tentative agreements to provide most city employees represented by the union with the protections of a comprehensive collective bargaining agreement—with implementation contingent on ratification by union members and state approval. According to the statement, “These agreements build on the master template agreement negotiated by AFSCME and the city-wide coalition of unions that include most non-uniformed employee bargaining units. That Coalition Template agreement was achieved in April.” Terms of the collective bargaining agreements will be presented to active employees who will have an opportunity to ratify the agreements. Public disclosure of the contract terms will occur after the agreements are ratified by June 30.

Detroit’s Land Bank. Detroit Mayor Mike Duggan’s land bank—or Neighbors Wanted Program, in its first month, has succeeded in auctioning off 33 homes, allowing the public to bid on properties from cottages in East English Village to sprawling four-bedroom houses in West Boston-Edison—but, mayhap of greater consequence, has drawn nearly $1 million in bids, with an average price of $22,000 per property—an amount significantly above the city’s median home price of about $11,000. Dekonti Mends-Cole, deputy director of the Land Bank, notes: “The whole thing has been surprising…We didn’t realize that there was such a level of pent-up demand. A lot of the people who are bidding are either Detroiters or individuals living in inner-ring suburbs.” (Interested readers can submit bids c/o of the auction website — buildingdetroit.org.)  There are rising hopes the auctions will help the city’s real estate market rebound: The Motor City is currently one of Realty Trac’s 10 hottest markets, with prices climbing in strong neighborhoods and inventory so tight that move-in-ready homes are snapped up within days and in all-cash deals. Nevertheless, expect bumps in the road: the difficulty of appraisals remains a complicating factor. The Motor City real estate market has been based on rock-bottom foreclosure sales for the past seven years, making it difficult for appraisers to know how to value a property—especially because 90 percent of a property’s assessed value is based on comparable sales: ergo, even if a home is exquisitely renovated, a gem of a property, it still will only be valued against what has sold recently nearby. One hope is that the Land Bank auctions will help create a bottom for the market — showing what people are willing to pay for un-renovated homes — and push up appraisals. The related good news is that Motor City foreclosure filings fell 61 percent since this time last year, according to RealtyTrac.

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