Detroit's revised bankruptcy plan sheds light on bonds, monitor

July 25 Fri Jul 25, 2014 5:16pm EDT

July 25 (Reuters) - Detroit released a revised debt adjustment plan on Friday that details the role of a post-bankruptcy monitor and sets up a reserve fund to possibly enhance recoveries for certain creditors.

The fifth revision of the plan filed in U.S. Bankruptcy Court creates a litigation trust related to Detroit's lawsuit seeking to void $1.45 billion of pension certificates of participation (COPs) sold in 2005 and 2006.

Should Detroit prevail in the suit, money the city would have had to use to pay off the debt would instead be divvied up, with 65 percent going to the voluntary employees' beneficiary associations (VEBAs) set up for city retiree healthcare costs and 20 percent going to limited-tax general obligation bondholders. A class of miscellaneous claims would receive the remaining 15 percent.

U.S. Bankruptcy Judge Steven Rhodes, who has yet to take up substantive issues in the COPs lawsuit, plans to start a confirmation hearing on Detroit's plan Aug. 14.

Syncora Guarantee Inc and Financial Guaranty Insurance Co, which insure payments on the COPs, have not settled with the city and face proposed minimal recoveries as a result.

The revised plan to deal with the city's $18 billion of debt sets a pecking order for unsecured bond claims with unlimited-tax general obligation bonds getting the biggest recovery at 74 percent. Under that deal, recoveries for claims involving limited-tax GO bonds (LTGO) and the pension COPs must be lower.

Ambac Assurance Corp, a LTGO creditor, said earlier on Friday that if Detroit fails to void the COPs, its recovery would remain at 34 percent, and if there is a COPs settlement it may get a partially increased recovery.

Before the recently finalized settlement, Ambac and fellow LTGO creditor BlackRock Financial Management had voted against the bankruptcy plan, according to ballot results on Monday. After the settlement, they both officially sought to change their votes to accept the plan.

PLENTY OF MONITORING

The revised plan also gave a glimpse into what life could look like after the city exits the largest municipal bankruptcy in U.S. history with a court-appointed monitor.

The document describes an individual whose "sole role and responsibility will be to evaluate the city's ongoing compliance with the plan and the confirmation order and to report to the bankruptcy court on such matter on a periodic basis in writing."

That will include filing quarterly reports on distributions, reserves, the status of bond settlements and litigation, the state of the exit financing, payments under debt instruments, and the carrying out of the "grand bargain" meant to protect the city's art collection while easing pension cuts for Detroit retirees.

The reports will also include the health of the retirement systems and pension funding levels. The bankruptcy court would be able to call conferences and request additional reports.

Under state law, the city will also have a financial review commission.

The plan monitor will be an officer of the court with immunity from lawsuits and can subpoena information, according to the filing.

The plan emphasizes that the monitor shall be a neutral party who has not been appointed or elected to Detroit or Michigan's governments.

The preferred candidate would have finance experience with municipalities with at least $250 million in annual revenues. The monitor should also have experience in complex financial and operational restructurings. (Reporting by Karen Pierog in Chicago and Lisa Lambert in Washington; Editing by David Gaffen and Lisa Shumaker)

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