July 10--The City of Detroit expects to shed about $7 billion in debt in Chapter 9 bankruptcy, allowing the city to escape 74% of its unsecured liabilities and reinvest heavily in services, according to internal city documents obtained by the Free Press.
But the debt-cutting goals -- which will still face extensive scrutiny and opposition during a sweeping mid-August bankruptcy trial -- come at a steep price, with investment banking firm Miller Buckfire expected to charge $28 million for helping the city restructure, the documents show.
An internal spreadsheet obtained by the Free Press shows the city has $9.9 billion in unsecured liabilities -- including pensions, retiree health care and losses from a disastrous Kwame Kilpatrick debt deal -- but plans to pay only $2.6 billion on those obligations, if Judge Steven Rhodes approves Detroit emergency managing Kevyn Orr's plan of adjustment.
By reducing its debts dramatically, Detroit will have about $1.4 billion in extra cash to reinvest in city services over 10 years, including improved public protection and blight removal.
When the city was negotiating with creditors before it filed for bankruptcy, Orr offered unsecured creditors pennies on the dollar, but that offer was viewed as a negotiating tactic designed to force creditors into accepting settlements.
The documents show how Detroit's bankruptcy fees are piling up as the case tarries and reveal how costly a municipal bankruptcy can be -- despite the significant benefits to residents in improved services.
-- Free Press investigation: How Detroit went broke: The answers may surprise you
Miller Buckfire will collect the full fee "upon a successful recapitalization or restructuring" of the city's debts, bank President Ken Buckfire said in an "expert report" prepared privately in advance of court hearings and acquired by the Free Press. The more than $2 million already paid to Miller Buckfire through December -- and the firm's $300,000-per-month advisory fee -- will be credited toward the city's final bill.
Buckfire told the Free Press in an e-mail that he's not authorized to speak publicly about the report.
"As the City's financial restructuring adviser, Mr. Buckfire's affidavit speaks for itself," Orr spokesman Bill Nowling said in an email. "His analysis correctly explains the financial situation facing Detroit and how the City's Plan of Adjustment is not only fair, but is absolutely essential for the future viability of the City and the improvement of basis services for its nearly 700,000 residents."
Miller Buckfire is responsible for negotiating a potential water department spinoff -- a potentially lucrative deal for the city -- and is directing high-stakes bond settlements with financial creditors.
The firm is also pursuing $300 million in fresh loans known as "exit financing" that would help Detroit execute its restructuring plan, according to the documents.
Buckfire said in the report that a "significant number of traditional municipal market institutional investors" have expressed interest in providing exit financing, which "confirms that the investing community is and will be available to the City on a post-emergence basis."
'Pennies on the dollar'
The documents also reveal for the first time that the city expects to pay limited-tax general obligation bondholders 34 cents on the dollar for their $164-million debt. The city had already revealed in June that it reached a tentative settlement with Ambac Assurance and Black Rock, but terms of the deal had not been revealed.
The settlement is less than what unlimited-tax general obligation bondholders are set to receive -- 74 cents on the dollar -- because the LTGO bondholders have a weaker legal position.
The Miller Buckfire documents illustrate how a dramatic reduction in the city's retiree costs will free up cash for city services.
All told, the city expects to reduce its unfunded pension liabilities by 54%, according to the Miller Buckfire spreadsheet. The city will reduce those liabilities from $3.13 billion to $1.45 billion through the bankruptcy.
That's because civilian retirees are being asked to accept 4.5% monthly pension cuts, the elimination of annual cost-of-living-adjustment (COLA) increases and a claw back of excessive annuity payments into the city's employee savings plan. Police and fire retirees are being asked to accept a reduction in COLA with no cut to pension checks.
Detroit is also cutting its retiree health care obligation by 89%, slashing a $4.3 billion obligation to $450 million that will be paid to two independent trusts that will administer benefits.
The other major source of debt cuts is a $1.4-billion borrowing deal orchestrated by former Mayor Kwame Kilpatrick in 2005 to eliminate the city's pension liabilities at the time. The debt -- called pension obligation certificates of participation -- has been a major source of contention in the bankruptcy because the city has argued the entire deal was illegal and should be wiped out.
Syncora and Financial Guaranty Insurance Co. (FGIC) -- the bond insurers that backed the deal -- and a group of European banks that own some of the debt would receive 11 cents on the dollar, according to the Miller Buckfire documents.
The documents could become evidence in a massive bankruptcy trial Judge Rhodes plans to begin Aug. 14 to consider whether to approve Orr's restructuring plan.
But first, nearly 70,000 creditors are voting on the plan of adjustment, with ballots due Friday to the city's agent in California. If retirees reject the plan of adjustment, the city may lose $195 million from the State of Michigan and $466 million in funding over 20 years from nonprofit foundations and the Detroit Institute of Arts to help reduce pension cuts and allow the DIA to spin off.
-- Voters' guide: Susan Tompor: What Detroit retirees need to know about the bankruptcy vote
The so-called "grand bargain" is a linchpin to Orr's plan and its collapse could cause major changes in the city's financial forecasts.
"Creditor distributions under the plan of adjustment benefit from the compromises reached by the City during the chapter 9 case, including significantly the 'Grand Bargain,' " Buckfire wrote. "If the plan of adjustment were not confirmed and the City's case were dismissed, hundreds of millions of dollars would be unavailable to creditors."
Buckfire argued that the city's plan of adjustment reflects the best deal creditors will get, saying creditors would not be immune from "the City's financial chaos and ruin" if the bankruptcy is dismissed.
He also argued that the city would benefit from state oversight approved by the Michigan Legislature and that investors are more likely to lend money to the city because of Orr's reinvestment plan
"The City's revitalization plan will also contribute to its ability to access the capital markets going forward," Buckfire wrote. "The revitalization efforts are assumed to attract a new tax base for the City. In addition, the City's revitalization efforts are relatively flexible with respect to timing. Because of the flexible nature of much of the revitalization efforts, the City has increased control of its financial future and has flexibility to meet its reduced debt service obligations going forward."
Before the bankruptcy, Detroit's unsecured debts and liabilities totaled:
Retiree health care costs: $4.303 billion
Unfunded pensions: $3.129 billion
Certificate debt issued to fund pensions*: $1.473 billion
General obligation bonds: $552 million
Swaps*: $290 million
Miscellaneous unsecured debt: $184 million
Total unsecured debts: $9.931 billion
Note: Detroit will maintain $6.4 billion in secured water, sewer, general obligation and parking bonds, which legally must be paid 100%.
Total unsecured Detroit debts following bankruptcy cuts:
Retiree health care costs: $450 million (89% cut)
Unfunded pensions: $1.447 billion (54% cut)
Certificate debt issued to fund pensions*: $162 million (89% cut)
General obligation bonds: $397 million (28% cut)
Swaps*: $85 million (71% cut)
Miscellaneous unsecured debt: $21 million (89%)
Total unsecured debts: $2.562 billion (74% cut)
*Note: These debts, backed by bond insurers Syncora and Financial Guaranty Insurance Co., were issued by Mayor Kwame Kilpatrick's administration in 2005 to finance $1.4 billion in unfunded pensions.
Detroit Free Press Staff Writer Joe Guillen contributed to this story.
Contact Nathan Bomey: 313-223-4743 or email@example.com. Follow him on Twitter @NathanBomey.
(c)2014 the Detroit Free Press
Visit the Detroit Free Press at www.freep.com
Distributed by MCT Information Services