A federal judge could once again push back the start date for the trial on Detroit's exit from the largest municipal bankruptcy in U.S. history after some creditors said on Tuesday a possible settlement is snarling key components of the restructuring plan.
The complicated settlement rests on a tender offer for $5.2 billion of the city's water and sewer revenue bonds. The deadline for bondholders to tender their debt voluntarily for repurchase is Aug. 21, the same day the trial is to begin, with the final settlement possibly becoming firm weeks later, in the middle of the proceeding.
Because the settlement could significantly alter the proposed restructuring plan that U.S. Bankruptcy Judge Steven Rhodes will weigh at the trial, some city creditors are asking for a two-week delay to the start date. They say that would give the city enough time to file a new version of the plan incorporating the settlement.
In a hearing on Tuesday, Rhodes, who has already delayed the trial once, appeared to agree.
Detroit wants to maintain the current schedule and has suggested moving testimony on the revenue bond settlement toward the end of the trial. If Rhodes decides the plan is fair and feasible, then the delay will make it hard for Detroit to meet some of its deadlines, lawyers for the city said at Tuesday's hearing.
"Understand what you're asking the court to do," Rhodes said to the lawyers. "You're asking the court to start a confirmation hearing on a plan you don't want confirmed, knowing you're going to file a plan two weeks later that you do want confirmed. That's very tough."
Since Detroit filed for bankruptcy protection more than a year ago, it has reached a long string of settlements on its $18 billion in debt and obligations.
But coming to an agreement around Detroit Water and Sewerage Department debt had seemed nearly impossible, and in July most of the bondholders voted against the city's debt adjustment plan. Last week, though, the DWSD announced the tender offer, saying those who agree to exchange their current debt for new bonds will not be able to oppose the restructuring plan.
There is a possibility, though, that not enough bondholders will tender their debt or the offer will not create "sufficient savings," Heather Lennox, an attorney for the city, said at the hearing. At that point, the current bankruptcy plan's treatment of the bonds will stand.
Three counties, meanwhile, whose residents pay for and receive DWSD services, object to the plan's proposed diversion of millions of dollars in department revenue to city pension payments. They claim that money is needed for critical water and sewer system improvements. On Tuesday, Rhodes allowed their objections to move forward.
WATER PLAN HAS MANY FACETS
Detroit outlined its tender offer for $2.75 billion of sewer bonds and $2.433 billion of water supply system bonds in a court filing late on Monday. It offers various purchase prices as percentages of the par amounts of the senior and second lien bonds.
If enough bonds are returned, Detroit would have to decide whether to finance the tender by issuing refunding bonds through the Michigan Finance Authority, with Citigroup as the senior underwriter, or by privately placing debt with Citibank and other yet-to-be determined financial institutions.
On Tuesday, the state authority approved the set-up and authorized the sale of $175 million of new debt for the department's capital needs in the coming year.
Under the public sale, the pricing date would be Aug. 26 with settlement on Sept. 4. The option calls for a portion of the 30-year bonds to be insured by Assured Guaranty and projects bond coupons of 5.75 percent or less.
With the new bonds, the city will seek a court order that water and sewer net revenue pledged as security constitutes a lien on special revenue.
The tender offer also reflects a deal between Detroit and four bond insurance companies, an ad hoc committee of bondholders and the bond trustee to tap no more than $24 million a year in water and sewer revenue for the city's General Retirement System, far less than the $43 million the city originally sought.