Detroit Settles with Bond Insurer; Chance of Debt Plan Success Boosted

By Chris Christoff and | October 17, 2014

Detroit settled with one of its last major creditors, bond insurer Financial Guaranty Insurance Co., bringing the city closer to ending the biggest-ever U.S. municipal bankruptcy.

The remaining holdout creditors, led by hedge fund managers including Aurelius Capital Management LP, will decide in the next few days whether to sign onto the deal, their lawyer told U.S. Bankruptcy Judge Steven Rhodes. The creditors, who hold more than $1 billion in pension-related debt, pulled out last night when they learned of a last-minute change in the proposal, Thomas Moers Mayer said.

The settlement would enable Detroit to carry out a rebuilding program that calls for spending at least $440 million clearing blight from troubled neighborhoods while requiring bondholders to invest money in redevelopment projects along the city’s riverfront.

Rhodes still must decide whether the city’s debt-adjustment plan is workable and fair. The FGIC settlement strengthens arguments that it’s equitable, said Doug Bernstein, a lawyer at Plunkett Cooney PC in Bloomfield Hills, Mich., who represents two charitable foundations involved in the case.

‘Vast Majority’

“It really should mean the plan gets confirmed if the judge finds the plan to be feasible in all other elements under the bankruptcy code,” Bernstein said. “You’ve got a vast majority of the creditors voting in favor of the plan. That satisfies the elements that it be fair and equitable and in the best interest of the creditors.”

The deal still needs at least three approvals before it’s final. New York state regulators that oversee FGIC must sign off, as must the Detroit city council or, if the council rejects it, a Michigan loan board that helps oversee Detroit’s finances. Rhodes has the final say on the settlement and the overall plan, which would shed about $7 billion in debt.

Detroit already reached settlements with other creditors, including public pension systems, under court-supervised mediation in the past year.

Rhodes scheduled a hearing for next week, saying he still plans to take testimony from a court-appointed expert hired to examine the city’s proposal.

Art Protection

At the center of the plan is an agreement with the state of Michigan and large philanthropies to protect Detroit’s art collection in exchange for hundreds of millions of dollars to shore up public pension funds. Some opponents said the art should be sold or used to secure loans to repay creditors.

FGIC had claimed Detroit owed it more than $1 billion because it insured pension-related debt that the city had proposed to pay at 10 cents or less on the dollar. The bond insurer also said the plan was improper because it treated different creditors unequally.

FGIC would drop those and all of its other objections to the plan under the deal.

“We are happy to report what has seemed like Detroit’s own version of the Gordian knot has been cut,” Corinne Ball, a lawyer for the city, said today in court. “We now have it done.”

FGIC is also settling claims on behalf of the hedge fund investors owed about $1 billion, Ball told Rhodes. Those bondholders include funds managed by Aurelius and BlueMountain Capital Management LLC. As the debt insurer, FGIC has the power to settle part, but not all, of the investors’ claims.

Cash Payment

Mayer said in an interview that his clients were ready to join the deal last night when they learned that an upfront cash payment to them of about $171 million would instead be spread out over several years.

Whether the hedge funds get the payment up front or over time, they are still getting more than what Detroit had initially proposed, Mayer said. The city had estimated pension bondholders would get back no more than about 10 percent of the $1.4 billion they are owed.

The settlements hinge on riverfront land that Detroit owns and has been trying to develop. FGIC and the bondholders will have an option to put a hotel and retail development on land now occupied by the city’s old hockey arena. FGIC and the bondholders will get $141 million in new notes, lawyers told Rhodes.

Under the deal, the bondholders would indirectly own from 83 percent to more than 90 percent of the Joe Louis arena and the related parking garage. The Detroit Red Wings of the National Hockey League are planning to leave the arena for a new stadium funded with tax money from the state of Michigan.

Demolished Arena

FGIC and the bondholders would have three years to build a hotel and retail center on the site. The city will pay to demolish the arena and parking garage, Ball said.

The arena is adjacent to a convention center that’s being redeveloped with help from the state and near riverfront property that’s being given to another bond insurer, Syncora Guarantee Inc.

Detroit filed for bankruptcy in July 2013, following decades of decline. The city listed $18 billion in liabilities and said it couldn’t meet its financial obligations while still providing necessary services to the public.

The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

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