August 14, 2014
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Getting Ready to Rumble. In the wake of yesterday’s session with attorneys representing the Motor City and its creditors before U.S. Bankruptcy Judge Steven Rhodes, the Judge set deadlines and hearing dates for the confirmation trial to determine if Judge Rhodes will approve the city’s proposed plan of adjustment—allowing the city to emerge from the largest municipal bankruptcy in history by finding that that plan is fair and feasible; Judge Rhodes announced he would delay the trial by eight days, scheduling the historic proceeding to begin Aug. 29th—scheduling as many as 30 calendar days for hearings over the restructuring plan, to determine whether the city’s proposed plan of adjustment to eliminate more than $7 billion in liabilities and reinvest $1.4 billion over 10 years in services is fair and equitable. Judge Rhodes set hearings for: Aug. 29; Sept. 2-5, 8-12, 15-19, 22-24, and 29-30; and Oct. 1-3, 6-7, and 14-17—with the October dates falling after the deadline of October 1—when Mayor Duggan and the Detroit City Council have the authority to request Emergency Manager Kevyn Orr to depart. In the trial, the Motor City will seek to prove it has assembled a plan that will provide for fiscal sustainability and services solvency—and that its plan is equitable. Judge Rhodes said he would allow testimony from an Ernst & Young official at an Aug. 19th hearing to be included as part of the trial, and he said yesterday he would allow retirees who do not have lawyers to present their own evidence and call witnesses when the hearing begins. Attorneys for Detroit and its creditors will begin their opening statements Sept. 2nd. The nearly six weeks’ of hearings are expected to pit Detroit and its supporters—including the Official Committee of Retirees, the city’s two pension funds, several major unions, and (likely) water and sewer bondholders (Please see Motor City Savings on Tap below) against its two major bond insurers — Syncora and FGIC, as well as several hedge funds. Judge Rhodes has allocated 85 hours of trial time equally between supporters and opponents of Mr. Orr’s proposed plan of adjustment to present their cases.
Motor City Savings on Tap? Detroit’s unique tender offer, for which it is seeking a go ahead from U.S. Bankruptcy Judge Steven Rhodes, for its $5.5 billion in water and sewer bonds, appears to be tapping into a potential a success. The offer, part of the city’s proposed restructuring of its DWSD bonds could prove a key step to alleviate a stalemate with the Department’s bondholders and, thereby, remove a difficult hurdle to the Motor City’s efforts to exit municipal bankruptcy. If the city is able to refinance the debt in a public offering, it projects interest rates would be at 5.75% or lower rate, even for uninsured bonds, according to documents filed in the federal bankruptcy court. In addition, Assured Guaranty has agreed to wrap at least some of the new bonds, which would feature a senior lien on the department’s revenues. The proposed refinancing includes the tender offer, a refunding of the tendered debt, a refunding of currently callable debt, and $190 million of new money bonds—with Emergency manager Kevyn Orr’s office warning that without the federal court’s approval, DWSD’s capital budget “will be perilously depleted beginning in October 2014.” That, in turn, could lead to federal EPA sanctions. The offer was cobbled together in the wake of mediation between the city and insurers Assured, Berkshire Hathaway Assurance Corp., Financial Guaranty Insurance Co., and National Public Finance Guarantee, as well as an ad hoc committee of water and sewer bondholders that includes Blackrock Financial Management Inc., Eaton Vance Management, Fidelity Management & Research Co., Franklin Advisors Inc., and Nuveen Asset Management, plus trustee US Bank NA. According to its filing with the court, “the tender would facilitate a consensual restructuring of DWSD’s capital structure, while rendering unimpaired all existing DWSD bond claims and resolving the DWSD bond objections to confirmation of the plan.” Under the proposal, each member of the ad hoc committee has agreed to tender a “significant portion” of its respective, impaired DWSD bonds—upon which Detroit would issue the new bonds either through a public offering, direct purchase, or a private placement—with the Motor City having sought Judge Rhodes’ affirmation that the pledge of DWSD net revenues would constitute a lien on “special revenues.” In the wake of payment to bondholders from the refinancing proceeds, the bondholders would be required to approve the city’s confirmation plan. In addition, under the agreement, the bondholders agreed the DWSD can pay $24 million annually to the Detroit’s general employee pension fund as part of its operation and management expenses—with the payment drawn from a pension liability payment fund that will be funded after payments are made into the state revolving fund junior-lien bond and interest redemption fund, according to the documents. The tender offer which began last week is scheduled to close a week from today—at which time the city will decide by Aug. 22 whether to tender the bonds. Detroit has asked the federal court to schedule a hearing on the motion on Aug. 25th—a motion which, if granted, would mean the bonds would go to market on or around Aug. 26, with a close scheduled for Sept. 4. The refinancing, if approved, would also let the city tap debt service reserve funds for current bonds that hold as much as $50 million, which it would use to reduce the size of the upcoming refunding.
A Taste of What’s to Come. Syncora Guarantee, a bond insurer and Motor City creditor bitterly opposed to the city’s proposed plan of adjustment, Tuesday filed an objection with Judge Rhodes challenging an $800 million settlement put together under the oversight of chief mediator, Gerald E. Rosen, Chief Judge of the United States District Court for the Eastern District of Michigan, whom Judge Rhodes had asked to serve during Detroit’s bankruptcy. Syncora charged that Judge Rosen had said repeatedly that he believed he ought to get the best outcome possible for a single group of creditors — the city’s retirees. Because, Syncora noted, the Motor City’s plan of adjustment was underpinned by the agreement worked out for the city’s retirees, the plan itself should be rejected as impermissibly tainted by the biases of its chief mediator, whose job it was to impartially negotiate out-of-court settlements of as many of the city’s debts as possible. While Syncora told the court it believed that Judge Rosen was acting out of good intentions, the federal court needed to assess whether that might unfairly bias against the requirement that similar creditors be treated equitably. Syncora is an unsecured creditor, as are Detroit’s retirees; but the insurer claims Detroit’s plan of adjustment – under which the city is seeking to repudiate the debt Syncora insured – is entirely inequitable, requesting that Judge Rhodes reject the plan immediately, calling the proposed settlement a “product of agenda-driven, conflicted mediators who colluded with certain interested parties to benefit select favored creditors to the gross detriment of disfavored creditors and, remarkably, the city itself.”
Speaking of Mediators….Key San Bernardino city officials and some of the city’s creditors met with their own court-appointed federal mediator, U.S. District Court Judge Gregg Zive, in Reno, Nevada—with discussions not including key creditor, the California Public Employees’ Retirement System, according to Michael McKinney, San Bernardino Mayor Carey Davis’ chief of staff. Likely CalPERS, the city’s largest creditor in its municipal bankruptcy, was not present, because the agency has forged an interim agreement with CalPERS in an effort to help form a plan for San Bernardino to exit bankruptcy protection—after the city withheld its employer portion of CalPERS pension payments from the time of its bankruptcy filing a year ago in July. CalPERS currently estimates San Bernardino’s debt to the agency at $16.5 million, plus interest—although in the outline of its pendency plan in 2012, the city had noted it intended to pay the full amount it owes CalPERS. Working toward a settlement between CalPERS and the city has been the centerpiece of mediation talks with, according to brief statements made in previous filings and court appearances—with the thinking being that once the largest piece of the city’s financial obligations was decided, the remaining parties would have certainty how much remained to adjust with the city’s other creditors.
Unchartering? San Bernardino’s Council could vote today on whether to put proposed amendments to the city charter up for a vote of the people. In our case study on San Bernardino, we noted that its city charter fragments decision-making authority over budgets, personnel, development, and other critical issues among the mayor, city manager, city council, and city attorney—not to mention several boards and commissions—constraints that we noted “Greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.” Now, after consideration of five amendments put together by a citizen review committee and discussed at city council meetings, the Council has narrowed its focus to two possible changes which its elected leaders hope could save the city money. At its previous meeting, the council decided not to pursue other proposed changes—changes which would have added a potentially sweeping statement that if multiple interpretations of a provision are possible, the one enabling the city applies; eliminated language governing the school district, which the district does not use; and replacing the city’s policy for recalls and initiatives with state policy. The council has the option of putting either proposed change on the ballot, both on the ballot as one item, both separately, or taking no action. Of the two amendments approved:
• One would eliminate a provision (§186) that guarantees that police and firefighters be paid the average of what 10 other cities with 100,000 to 250,000 people pay. Instead, pay would be set by collective bargaining as it is for other city employees — long a flash point in the city and the focus of most citizens’ charter comments, pro and con, since before the review committee recommended it.
• The second would end the practice of paying any employee who has been terminated or demoted until that employee has the chance to appeal the city’s decision to the civil service board.
With regard to public safety compensation, Mayor Carey Davis said he understood the city cannot underpay its public safety personnel; “[h]owever, I support the committee’s suggestion that salaries should be determined by market forces and our ability to pay…The modifications to Section 186 do NOT represent an automatic pay decrease but it does provide some flexibility to the Council and our public safety personnel with regard to salary discussions which will still be subject to California Law.”