News Column

What to expect in Detroit's $18 billion bankruptcy vote due today

July 11, 2014

By Nathan Bomey, Detroit Free Press

July 11--The fate of Detroit's bankruptcy rests in the hands of retirees, bondholders, banks and small creditors -- with their votes due today on a sweeping restructuring plan that would allow the city to dramatically reduce its $18 billion in liabilities and reinvest in basic services.

To a large extent, the city's hopes for emerging from Chapter 9 bankruptcy this fall hinge on whether pensioners vote to accept pension cuts and allow the Detroit Institute of Arts to spin off as an independent institution.

Nearly 70,000 of the city's 170,000 creditors -- including about 32,000 pensioners -- are allowed to vote on the city's plan of adjustment.

"It is an absolutely historic moment in Detroit's history," said Ryan Plecha, a bankruptcy attorney who represents Detroit's retiree associations. "It's going to determine whether retirees are protected from additional harm, whether the city can rebuild and whether the state can be protected."

The city is not required to publicly release the voting results until July 21, although several creditors expect the official tallies to be revealed sooner. A balloting agent in California is counting the results.

"The city must first tally and double- and triple-check the results," said Bill Nowling, a spokesman for Detroit emergency manager Kevyn Orr. "Then it will prepare a formal affidavit for the bankruptcy court that attests to the results, which it will file on July 21."

Attorneys involved in the case and outside experts who spoke to the Free Press for this story said they would be surprised if pensioners reject the grand bargain, but they're not ruling out the possibility of a "no" vote.

But even if pensioners back the deal, several other classes of creditors may vote no on Orr's plan to slash debts and allow the city to reinvest $1.4 billion over 10 years to improve police and fire protection, slash blight and restore dilapidated technology systems.

That would set up a bitter clash between the city and financial giants that could yet derail the city's restructuring hopes.

Unlike a political election, a simple majority is not enough. It's a twofold test for each class of voters to approve the plan of adjustment:

-- In each individual class, a majority of the voters must vote yes.

-- And the "yes" voters in each class must represent at least two-thirds of the debt owed to them.

If a class rejects the plan, the city can ask Judge Steven Rhodes to forcibly implement the restructuring blueprint through a legal process called a "cram down."

The so-called grand bargain -- funded by $195 million upfront from the State of Michigan and $466 million over 20 years from nonprofit foundations and DIA donors -- is the backbone of Orr's "plan of adjustment," the legal term for a municipal bankruptcy restructuring blueprint. After factoring in interest over time, and some other considerations, it's the equivalent of $816 million.

Two classes of pensioners -- civilian retirees and police and fire retirees -- are casting ballots on the grand bargain. If they vote yes, the city will carry significant momentum into a massive trial expected to start Aug. 14, when Rhodes will decide whether the entire plan is fair, legal and feasible.

But if pensioners vote no, the city will be forced to decide whether to ask Rhodes to cram down significant cuts over the objections of retirees.

"As an economic matter, it should be a no-brainer for both classes (of pensioners)," said Laura Beth Bartell, a bankruptcy law professor at Wayne State University. "They're making out like bandits compared to everybody else. But it's not where they want to be, which is where they were before. I think the quiet majority ... will vote yes."

Here's a breakdown of what to expect with the vote for each class:

Class 1: Water and sewer bondholders

-- Who owns or controls this debt? Major bond insurers, individuals and financial giants such as Black Rock

-- What they're owed: $5.8 billion

-- The city's offer: 100%

-- Where they stand: This debt is secured, which means it's protected from cuts. Nonetheless, mediation talks between the city and the bondholders have tarried without a settlement. Why? Because the city is trying to replace the bonds without paying all future interest.

Classes 2-4, 6: Secured general obligation bonds, other secured claims, U.S. Housing and Urban Development loans, parking bonds

-- Who owns or controls this debt? A variety of investors (Classes 2-3, 6); Uncle Sam (Class 4)

-- What they're owed: $494 million (Classes 2-3); $90 million (Class 4); $8 million (Class 6)

-- The city's offer: 100%

-- Where they stand: This debt has rock-solid legal standing and the city can't get out of it.

-- Free Press insight: These creditors don't vote because they are being paid in full. The city may still privatize its parking lots and garages; the bondholders will be paid 100% regardless.

Class 5: Swaps

-- Who owns or controls this debt? Bank of America Merrill Lynch and UBS own the swaps, which were insured by Syncora and Financial Guaranty Insurance Co. (FGIC)

-- What they're owed: About $288 million

-- The city's offer: $85 million

-- Where they stand: Bank of America and UBS agreed to accept $85 million to eliminate the swaps, which former Detroit Mayor Kwame Kilpatrick's administration purchased in 2005 to lock in a steady interest rate of 6% on a $1.4-billion pension debt deal. Judge Rhodes approved the settlement after twice rejecting previous deals he deemed too generous for the banks and questioning the legality of the swaps.

-- Free Press insight: The swaps were secured in 2009 by a collateral pledge of Detroit's vital casino revenue -- but Judge Rhodes questioned the legality of the entire deal, and the banks opted to settle instead of fighting the city further. They'll approve it. "The judge kept putting pressure on them to do better for the city, and the city was in fact able to get a better deal for itself," said Michael Sweet, Fox Rothschild bankruptcy attorney not involved in the case. "So that was the right approach."

Class 7: Limited-tax general obligation bonds

-- Who owns or controls this debt? Ambac Assurance and Black Rock control most of it, with Syncora holding a smaller amount.

-- What they're owed: $164 million

-- The city's offer: Unknown

-- Where they stand: Black Rock and Ambac have agreed to a tentative settlement, but the terms have not been revealed.

-- Free Press insight: A "yes" vote is inevitable unless the settlement unravels.

Class 8: Unlimited-tax general obligation bonds

-- Who owns or controls this debt? The lion's share is controlled by bond insurers Assured, Ambac and National Public Finance Guarantee.

-- What they're owed: $388 million

-- The city's offer: 74%

-- Where they stand: The bond insurers agreed to a deal to allow the city to divert 26% of their debt to low-income retirees who face pension cuts.

-- Free Press insight: Expect a "yes" vote. But this deal will face legal challenges during the trial.

Class 9: Pension obligation certificates of participation (COPs)

-- Who owns or controls this debt? Syncora and FGIC control most of the debt, although several European banks also own a substantial portion.

-- What they're owed: $1.473 billion

-- The city's offer: 0% to 10%

-- Where they stand: The fiercest fight in the bankruptcy is here. Syncora and FGIC argue they are being unfairly treated and have pushed for the City of Detroit to consider selling Detroit Institute of Arts treasures to pay their debts.

-- Free Press insight: Expect a "no" vote. A settlement -- albeit feasible -- would be an extraoradinary breakthrough considering the bitter dispute between the city and Syncora and FGIC. Still, a settlement is possible before the bankruptcy trial begins -- or perhaps even during the trial. For now, the insurers are arguing that Kevyn Orr's plan unfairly discriminates against them in favor of pensioners. "I expect a cram down," Wayne State's Bartell said.

Class 10: Police and Fire Retirement System pensions

-- Who owns or controls this debt? Police and fire retirees and active uniform employees who are vested in their pensions.

-- What they're owed: $1.25 billion in unfunded future pension promises.

-- The city's offer: 100% payment of their monthly pension checks and a reduction in annual cost-of-living adjustment (COLA) increases from 2.25% to 1%.

-- Where they stand: The U.S. government-appointed Official Committee of Retirees, a major retiree association and the pension board representing the police and fire retirees reached a deal with the city to recommend a "yes" vote. If Class 10 and Class 11 vote yes, the city would agree to transfer the DIA to an independent charitable trust in exchange for the grand bargain money directed toward pensions.

-- Free Press insight: A "no" vote would be stunning. Although active police and fire unions have refused to recommend the deal, retiree groups have been waging an educational campaign to convince members to approve the deal.

Class 11: General Retirement System pensions

-- Who owns or controls this debt? Civilian retirees and active employees who are vested in their pensions

-- What they're owed: $1.879 billion in unfunded future pension promises.

-- The city's offer: 95.5% of their monthly pension checks, the elimination of COLA benefits and the clawback of excess annuity savings fund distributions from 2003-13.

-- Where they stand: The Official Committee of Retirees, a major retiree association, the pension board representing civilian retirees and AFSCME Council 25, the city's largest union, are recommending a "yes" vote.

-- Free Press insight: There's a lot of suspense here. A "no" vote, which could be disastrous for retirees, is nonetheless not out of the realm of possibility. But people involved in the case say they would be surprised if civilian retirees reject the deal. Although many vocal opponents have protested the cuts, insiders believe a silent majority of pensioners is poised to back the settlement.

Class 12: Retiree health care benefits

-- Who owns or controls this debt? Detroit retirees

-- What they're owed: $4.303 billion in unfunded health care promises

-- The city's offer: 10%

-- Where they stand: The city will devote $450 million to retiree health care trusts that will deliver substantially reduced benefits to retirees in both classes.

-- Free Press insight: With little legal leverage, these cuts were virtually inevitable. The city's retiree committee told retirees that if they want to lodge a protest vote, they could do so in Class 12 without harming the grand bargain. So a "no" vote is possible, even though it probably won't stop the cuts. Because retirees are being advised to vote yes on pension cuts, there's also a good chance of a "yes" vote on retiree health care cuts.

Class 13: Downtown Development Authority debt

-- Who owns or controls this debt? DDA city appointees

-- What they're owed: $33.6 million

-- The city's offer: 10% to 13%

-- Where they stand: The DDA debt has been a minor issue in the case.

-- Free Press insight: It's hard to envision the DDA, whose trustees are city boosters, rejecting the plan of adjustment. Expect a "yes" vote.

Class 14: Other unsecured claims

-- Who owns or controls this debt? A variety of creditors, including people who sued the city and won settlements, as well as city vendors that had contracts canceled

-- What they're owed: An estimated $150 million

-- The city's offer: 10% to 13%

-- Where they stand: This group of creditors is not well coordinated and is thus hard to gauge.

-- Free Press insight: A "no" vote is likely. For example, anyone who sued the city and won a major settlement for a wrongful death is being asked to accept a substantially reduced settlement. But a "no" vote in this class, although not meaningless, is unlikely to make waves.

Class 15: Convenience claims

-- Who owns or controls this debt? A variety of creditors with debts of $25,000 or less

-- What they're owed: Unknown

-- The city's offer: 25%

-- Where they stand: It's difficult to know which creditors will land in this category.

-- Free Press insight: In a typical bankruptcy move, the city is offering small creditors a small premium as a carrot to vote yes.

Contact Nathan Bomey: 313-223-4743 or nbomey@freepress.com. Follow him on Twitter @NathanBomey.

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(c)2014 the Detroit Free Press

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Source: Detroit Free Press (MI)


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