July 31, 2014
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Trial Delay. U.S. Bankruptcy Judge Steven Rhodes on Tuesday said he had decided to push back the date of the confirmation hearing of Detroit’s plan of adjustment by one week to August 21st—in part to ensure creditors opposed to the city’s plans would have adequate time to peruse the emergency manager’s fifth version of the plan—just filed last Friday, noting: “The court concludes that the record does establish extraordinary cause for the limited adjournments of hearing dates and the limited extensions of deadlines.” Judge Rhodes scheduled dates for the trial through September 23rd. Emergency Manager Kevyn Orr has reached settlements with all of the Motor City’s major labor groups, but a handful of financial creditors, all related to the city’s municipal bond debt, remain opposed. In settling on the seven day delay, Judge Rhodes said he took into account creditors’ requests for delays in making his decision: “The court concludes that the record does establish extraordinary cause for the limited adjournments of hearing dates and the limited extensions of deadlines set forth in this order…However, the court again concludes that the record fails to establish cause for the adjournments and extensions that these creditors have requested.” Under the new schedule, all depositions of experts and non-experts need to be completed by Aug. 11; the deadline for objectors to file supplemental objections to the current plan of adjustment (version 5) is August 12th, and pretrial briefs are due to the federal court no later than August 15th. Judge Rhodes set aside the following dates, if necessary, for the trial: Aug. 22, Aug. 25-28, Sept. 2-5, Sept. 8-12, Sept. 15-19, and Sept. 22-23.
How many monitors? Detroit Emergency Manager Kevyn Orr has withdrawn his modified proposal incorporated in the most recent (5th) plan of adjustment filed with the federal bankruptcy court last Friday to provide for a monitor to track the implementation of the Motor City’s plan of adjustment—if and when approved by Judge Rhodes, filing a modification with the court late Tuesday to delete the so-called “plan monitor,” who would have been responsible for keeping U.S. Bankruptcy Judge Steven Rhodes up to speed on the city’s recovery progress. Mr. Orr’s spokesperson said that Mr. Orr decided to withdraw his proposal to hire a post-municipal bankruptcy monitor after speaking with state officials and Mayor Mike Duggan, and coming to the conclusion that with the state already having created a financial review board and other statutory provisions, that should provide sufficient oversight: “The monitor would have been superfluous to the oversight outlined in the … legislation.”
No Subpoena. Financial Guaranty Insurance Co. (FGIC), a holdout creditor, has reached an agreement with the State of Michigan to withdraw its subpoena of Michigan Gov. Rick Snyder. Nevertheless, FGIC still intends to subpoena and depose the Governor’s Chief of Staff, Dennis Muchmore, as well, possibly, as other members of the Governor’s staff. Moreover, FGIC reserved the right to depose Gov. Snyder in the future as part of its efforts to get the federal court to reject the Motor City’s plan to repudiate $1.4 billion of its certificates of participation (COPs), for which FGIC is the main insurer. In addition, FGIC intends to grill Mr. Muchmore on issues related to the Motor City’s assets that could be monetized, such as the value of the Detroit Institute of Art’s world class collection.
Gambling on the 6th. In the wake of the 6th U.S. Circuit Court of Appeals’ challenge late Tuesday to Motor City holdout creditors to decide within 48 hours if they intend to contest Detroit’s eligibility for bankruptcy and its plan to cut pensions, Judge Julia Smith Gibbons, who heading a three-judge panel that was to hear the arguments, wrote that she was pleased that settlement negotiations were progressing, but that time was running out: “The panel does not consider further delay in rendering a decision an option at this time.” Judge Gibbons explained the panel required time to rule before U.S. Bankruptcy Judge Steven Rhodes opines on the Motor City’s proposed plan of adjustment—with that trial scheduled to commence August 21st. Judge Gibbons gave creditors until the close of business today to determine whether or not to proceed. In any event, Syncora Guarantee did proceed with its efforts to bar Detroit’s access to its casino revenues, appealing the lower court’s decision that the $15 million in monthly casino revenues belongs to the city—an appeal which one of the trio of judges termed: “fairly Draconian.” Syncora was appealing U.S. District Judge Bernard Friedman’s concurrence with U.S. Bankruptcy Judge Steven Rhodes’ ruling of last August that the casino revenues are property of the bankruptcy estate and subject to an automatic stay freezing lawsuits against the city. The company claims it has a lien on the money, which had been used as collateral since 2009 to secure the swap agreements. Detroit, which entered those agreements to hedge interest-rate risk on pension debt, agreed in a settlement earlier this year to pay $85 million to the swap providers. Syncora has maintained the settlement would cause it financial harm. (Syncora is one of two bond insurers that insured the underlying debt of former Mayor Kwame Kilpatrick’s administration that was issued to prop up the city’s pension funds, and it has been arguing that the casino tax revenues should be dedicated to making payments on the city’s $1.4 billion in pension debts, rather than forcing Syncora to pay the insurance claims.) Judge Julia Smith Gibbons gave no timeline for a decision but told the parties the three-judge panel would consider the arguments “carefully.” The federal appeals court had initially scheduled oral arguments for yesterday on seven other cases that appealed Judge Rhodes’ December decision finding that Detroit was eligible to file for municipal bankruptcy, but those proceeding were canceled at the request of the city and the appealing parties due to actual or pending settlements. Attention is now expected to revert to four other Detroit creditor groups that have been seeking to appeal Judge Rhode’s chapter 9 eligibility decision of last December: the Detroit Fire Fighters Association, Detroit Police Officers Association, Retired Detroit Police Members Association, and the city’s two pension funds; but the groups, who have reached agreements with the city, spent much of last weekend in an effort to get the hearing scrubbed.
How’s Detroit Progressing? Residents will be able to view the number of new streetlights installed in their Detroit neighborhood, how many lots were mowed and the number of vacant houses demolished by going to the city’s website. The Detroit Dashboard features links to information on community initiatives and city programs. For instance, the DD last week registered that 12,000 vacant lots were mown, 570 tons of illegally dumped trash and other materials removed, and 88 homes were torn down. In addition, the DD has reported that 57 lawsuits have been filed against owners of abandoned properties. Updates are scheduled for today and every Thursday.
Are there Motown Lessons for State & Local Leaders? The state and local credit rating agency , Standard & Poor’s, or S&P, yesterday hosted a webinar with regard to the relationship of pension debt of a municipality versus its bond indebtedness, with its analyst Rod Lukic commenting: “All politics is important, and it plays a role in recovery…Main Street factors should be considered when conducting your recovery analysis.” Mr. Lukic was focusing on the discrepancies in the way in which the Motor City worked pit dissimilar settlements with some of its biggest creditors, noting the significant distinctions between the 26% haircut for Detroit’s unlimited tax general obligation or GO bondholders versus more than double that, 66%, for its limited-tax GO municipal bond holders, compared with much smaller haircuts for its retirees: “It’s brought out a good dialogue on how pensioners are treated over bondholders, and the contrast in this case is pretty stark…The question is, is it going to inform the actions or conversations going forward for other distressed issuers (municipalities)?” The biggest less learned, Mr. Lukic noted, is that in a severe distress situation, “governments are increasingly forced to choose between essential services and honoring their debt obligations…The recovery analysis needs to be flexible enough to capture all the nuances of legal and even political [factors] that impact recovery prospects.” He added that an important factor for potential purchasers of a city or county’s municipal bonds is whether the city or county is located in a state that provides a statutory lien on GO bonds. Finally, he commented that while the Motor City’s municipal bankruptcy has not yet formally altered the way in which S&P rates state and local tax-exempt bonds, the agency could change its market risk profile of municipal GO bonds in the future.