August 28, 2014
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Drip. Yesterday’s Michigan Finance Authority sale of some $1.8 billion in municipal revenue bonds on behalf of the Detroit Water and Sewerage Department to finance the purchase of debt from investors attracted orders from about 64 institutional buyers, including many who participated in the department’s tender offer program, according to the Detroit Water & Sewerage Department (DWSD), netting the Motor City an estimated $249 million of interest rate savings over the life of the bonds. DSWD officials credited the favorable outcome to bond rating upgrades, investor outreach, and U.S. Bankruptcy Judge Steven Rhodes approval Monday of the voluntary tender offer and refinancing, noting that despite the city of Detroit’s municipal bankruptcy status, its outreach and strategic and financial plan, combined with updates on the Detroit economy by community leaders, and a tour of the sewage treatment plant appear to have contributed to the successful sale of the $855 million of senior and second lien water bonds and $937 million of senior and second lien sewage bonds. Bond documents warn several times that Detroit is at risk of filing for Chapter 9 bankruptcy again—in which case, according to the documents―the water and sewer bonds are subject to extraordinary optional redemption at par. Detroit will amend its plan of debt adjustment and treat all of the water and sewer debt as unimpaired once the sale closes and the tendered bonds are purchased, with the untendered bonds continuing to get the scheduled principal and interest payments. DWSD’s bond portfolio totals $5.2 billion.
The Unfine Art of Municipal Bankruptcy. Art Capital Group has offered to loan the Motor City as much as $4 billion, but only on the condition that the City would, in effect, broach the so-called Grand Bargain and instead pledge the Detroit Institute of Arts and its collection as collateral to secure the loan, in effect handing over rights to the city-owned museum’s internationally acclaimed collection—and, likely, forcing the city to sell some of the Institute’s artwork to help finance the loan. But the deal would require the city to pledge the Detroit Institute of Arts and its collection as collateral to secure the loan — a process that would be highly unlikely considering it would require a legal battle over rights to the city-owned museum’s prized collection. The pre-trial move by Art Capital Group LLC is supported by Financial Guaranty Insurance Co. (FGIC) and implicitly supported by Syncora Guarantee Inc., two holdout creditors of the city—with Art Capitol purporting that it has made the offer in an effort to provide “the city, and the entire community, $3 billion to $4 billion.” The New York-based Art Capital wrote in a prepared statement. “Our goal is to do everything we can to keep the DIA’s art collection in the city and intact. We’ll work with the city to structure the loan with the flexibility needed so it does not become an unreasonable burden.” FGIC called the Art Capital offer “a game changer,” adding: “It represents a real and viable solution that could enhance recoveries for all creditors by billions of dollars and catalyze the revitalization of the City — while also keeping the DIA collection in Detroit. Choosing to proceed with the inferior ‘Grand Bargain’ would be opting to disregard common sense at the expense of all parties…The city cannot ignore the fact that the Art Capital proposal is a game changer…It represents a real and viable solution that could enhance recoveries for all creditors by billions of dollars and catalyze the revitalization of the city – while also keeping the DIA collection in Detroit. It is an extremely attractive option for all stakeholders and a win for all sides. Choosing to proceed with the inferior ‘grand bargain’ would be opting to disregard common sense at the expense of all parties.” The offer, nearly double what the group offered last April, would reduce the city’s indebtedness by nearly 25 percent if accepted—but leave one of its most critical assets for its economic future at risk. Emergency manager Kevyn Orr’s office yesterday responded that Detroit rejects the offer and stands behind the so-called Grand Bargain that would retain the DIA as an independent entity, and leverage $815 million in combined state aid and non-profit contributions to ensure no city retiree falls below the federal poverty level and that the prized art collection will remain a jewel of the city—with spokesperson Bill Nowling stating: “The city will not sell or leverage the art. This latest proposal is nothing but a thinly veiled attempt by our remaining hold-out creditors to improve their recovery at the expense of the city’s pensioners and its cultural assets,” asserting that acceptance of the proposal would force drastic, double-digit pension cuts to the city’s retirees and undercut the unprecedented state intervention package or grand bargain. FGIC supports the Art Capital offer, noting: “It represents a real and viable solution that could enhance recoveries for all creditors by more than $2 billion and catalyze the revitalization of the city, while also keeping the DIA collection in Detroit.” Detroit’s rejection of the offer also came in the wake of its requested assessment of the offer by ArtVest Partners co-founder Michael Plummer, who Mr. Orr hired to evaluate the value of the world-class Institute. Mr. Plummer determined in his assessment for the city that the Art Capital deal was “not economically viable.” Moreover, Mr. Orr’s office has also questioned whether the DIA’s property legally can be sold: DIA leaders have vowed a legal battle if the city were to pursue a sale or a collateralized loan.
Electric Municipal Bond Jolts. Hedge funds have been negotiating with Puerto Rico’s public power authority (PREPA) over a possible restructuring of more than $8 billion in municipal bonds in the wake of a forbearance agreement the authority entered into two weeks ago, which includes a list of all the bondholders, who represent some 60 percent of PREPA’s $8.3 billion in outstanding municipal revenue bonds. While Puerto Rico’s municipal bonds have traditionally been held by municipal bond mutual funds, the territory’s deteriorating fiscal condition and inability to file for federal bankruptcy protection has led to financial contortions as a means of averting insolvency. The list includes 15 creditors, of which three of those were already known to have been a part of the forbearance agreement—and which three filed suit against Puerto Rico earlier this year to annul a new law that allows public corporations such as PREPA to restructure their debt. A key issue is that PREPA’s forbearance arrangements with creditors reinforce banks’ claims of priority over bondholders in receiving repayment—a situation which makes it more difficult for the territory’s municipal bondholders to force increases in PREPA rates. PREPA has about $8.3 billion in bonds outstanding; the utility has indicated it will restructure its debt next March. Under the first agreement, the bondholders gave up their rights to sue PREPA for at least several months and signed non-disclosure agreements. With insufficient resources to both continue operations and make interest payments to its municipal bondholders, the utility has been paying its operational expenses in order to ensure continuity in its operations—before making its interest payments to its municipal bondholders—almost as if it were in a chapter 9 municipal bankruptcy—even though, because it is not a municipality, it cannot legally seek federal authority to do so. According to PREPA’s forbearance agreements with the bondholders and the banks, PREPA has $8.3 billion in outstanding revenue bonds and owes $696 million to Citibank, Scotiabank de Puerto Rico, Banco Popular de Puerto Rico, Oriental Bank, and Firstbank Puerto Rico. Two weeks ago, PREPA made changes to its bond-governing agreement which would make it more difficult for its municipal bondholders during the forbearance period to initiate a legal process to force rate increases. That jolt likely electrified bondholders, because the pre-existing 1974 agreement with its bondholders provided that the utility would adjust its rates so that revenues, at a minimum, would be equal to at least PREPA’s current expenses plus a level covering at least 120% of aggregate principal and interest payments to its bondholders—and that, if PREPA failed to follow said agreement, and if 10% of the bondholders requested the bond trustee to take action, then the trustee was directed to sue PREPA to force it to increase its rates. However, under a critical portion of the forbearance portion of the agreement, triggering an adjustment would require 50 percent of the bondholders to initiate such a suit—an outcome considered unlikely, thereby putting off any potential electric confrontation until the current agreement expires next March, when the utility intends to introduce a restructuring plan. Moreover, the utility claims that if it were to file for the protection of the Public Corporations Debt Enforcement and Recovery Act for restructuring during the forbearance period, the forbearance agreement itself would be voided.
Harried in Harrisburg. Harrisburg, Pa. Mayor Eric Papenfuse, in the wake of charges by the Dauphin County DA that the capitol city’s Treasurer, John Campbell, had stolen from a nonprofit, Tuesday said there was no threat to the city: “All accounts are in order and the city treasury continues to function in the midst of this dilemma.” The clarification came hours after Dauphin County District Attorney Ed Marsico charged Mr. Campbell with writing 10 checks to himself totaling about $8,400 from the account of Historic Harrisburg Association while he was its executive director. Mayor Papenfuse Tuesday named former City Treasurer Paul Wambach to oversee the office in Campbell’s absence, with the municipality’s solicitor stating: “As chief executive officer of the city, the mayor has an obligation to protect the city’s assets…Under that, he can take whatever steps he deems necessary as long as it’s not contrary to state law or the Constitution.” The County is charging him with theft by failure to make required disposition of funds received and a charitable organizations act violation. The financial charges against Mr. Campbell come in the wake of Harrisburg’s so far successful efforts to recover from the brink of municipal bankruptcy. (Unrated Harrisburg late last year began implementing a financial recovery plan that erased $600 million of debt, largely through the sale of the city incinerator and a long-term lease of parking assets. The plan includes four years of balanced city budgets and other measures designed to repair Harrisburg’s reputation in the capital markets. Incinerator and parking bond sales both closed in late December.) The Mayor indicated he fully expected Mr. Campbell to resign, warning that if he did not, the city would go to court “to settle this matter once and for all…We have cut off Mr. Campbell’s Internet access and he will not be welcome here on the premises.” In addition, the Mayor made clear that the treasurer and city controller must sign off on all city checks—adding that the issue came to light (no pun) after the Historic Harrisburg Association noticed the money missing several weeks ago, when it intended to reimburse the city toward $24,000 it had pledged under its Lighten Up Harrisburg program to help fix street lights. The Mayor noted that the city has yet to receive any reimbursement.