Mediation session on pension debt ordered in Detroit bankruptcy

June 27 Fri Jun 27, 2014 4:09pm EDT

June 27 (Reuters) - Detroit and a group of hold-out creditors will meet on Monday over one of the last unresolved major issues in the city's historic bankruptcy case.

U.S. Judge Gerald Rosen, who is heading mediation in the case, late on Thursday ordered bond insurance companies and European banks into mediation with Detroit on $1.4 billion of certificates of participation (COPs) the city sold in 2005 and 2006 to boost funding for its two retirement systems.

The city proposed minimal recoveries for the COPs in its plan to adjust $18 billion of debt and exit the biggest municipal bankruptcy in U.S. history. Detroit, which stopped paying on the COPs in June 2013, has also asked the federal court to void the debt all together.

That treatment has rattled bond insurer Syncora Guarantee Inc, which has emerged as the city's chief nemesis in the case as it fights for a bigger recovery for its nearly $400 million exposure, mainly from insuring some of the COPs.

Syncora's attorney, James H.M. Sprayregen, a partner at Kirkland & Ellis, declined on Friday to comment on the mediation order. On Wednesday he told Reuters the company was willing to negotiate.

"We still have hopes of a consensual resolution here and our door is open for that discussion," he said. "But in the absence of that we just don't see the appropriateness legally of being able to confirm this plan when it treats us so massively differently than the rest of the similarly situated creditors without in our view a legal basis."

Under the so-called grand bargain in Detroit's plan, city worker pensions would fare better than the COPs due to money pledged by philanthropic foundations, the Detroit Institute of Arts and the state of Michigan.

Kevyn Orr, the city's emergency manager, has reeled in agreements with several major creditors over certain general obligation bonds and other matters. But deals with other creditors, including Syncora and Financial Guaranty Insurance Co, which also insured the COPs, have not emerged in the months since the city's bankruptcy filing in July 2013. A FGIC spokesman declined to comment on mediation.

Syncora unsuccessfully objected to Detroit's plan to settle interest rate swap deals related to the COPs and had many of its legal maneuvers blocked by the federal court, with the latest occurring on Thursday. Syncora and Detroit have peppered their court filings with colorful barbs aimed at each other.

Additional parties ordered into mediation over the COPs are Wilmington Trust Co, Berkshire Hathaway Reinsurance Group and European banks that own some of the debt. A confirmation hearing on Detroit's debt adjustment plan is scheduled to begin Aug. 14. (Reporting by Karen Pierog; Editing by Leslie Adler)