* Creation of regional water district would shift costs
* Interest rate swap deal not part of settlement
* Philanthropists, state would cover pensions; bondholders
By Bernie Woodall
DETROIT, Jan 31 Detroit has circulated a
financial plan that requires significant concessions from its
pension funds and bondholders and declares that an interest-rate
obligation that helped drive the city into bankruptcy is a
disputed claim that is not part of the settlement.
The plan also calls for creating a regional water district
to shift other costs.
The proposals, described in a copy of the plan obtained by
Reuters on Friday, are a major step in Detroit's historic
bankruptcy case, a blueprint for how Emergency Manager Kevyn Orr
proposes to treat more than $18 billion in debt and long-term
After months of negotiations with creditors, it essentially
sets terms for what could be a settlement of claims and could
put pressure on Detroit's thousands of creditors to accept the
proposed deal or face costly litigation.
The ultimate resolution of the bankruptcy will rely on
Detroit restructuring its debt, bringing in contributions from
philanthropic foundations and the state of Michigan, offloading
some of its obligations to a new regional water authority, and
issuing about $1.36 billion in new debt. Roughly 28 percent of
settlement funds would go to pensions and 25 percent would go to
bondholders, according to a source with knowledge of the
"It's a moving target, and this has not been settled," said
the source. "It's very complex. It's like six levels of chess
while playing tennis," the source added.
The creation of a new Great Lakes Water Authority, which
will pay the city $47 million a year during a 40-year lease of
the city's share of water facilities, is a major part of the
plan. The new authority would assume all pension liabilities
owed to current and former Detroit Water and Sewer Department
Detroit would stop using its money to make payments to its
police and fire pension funds, as well. Instead, those pension
contributions would come from $470 million pledged by
philanthropic foundations and the Detroit Institute of Arts and
a proposed state contribution of $350 million.
Detroit also would swap out the Detroit system's $5.3
billion of water and sewer bonds for new debt issued by the
regional authority on a dollar-for-dollar basis.
To help fund its financial settlements with bondholders and
other creditors, the city would issue $837.9 million of
Detroit's plan to issue new debt to pay creditors was seen
as questionable by some analysts in the U.S. municipal bond
market. "The description of the plan merely digs Detroit into a
deeper hole with creditors, further jeopardizing the city's
ability to sell bonds and borrow needed funds to repair their
infrastructure and improve the city's ability to provide stable
essential services for the safety and welfare of its citizens,"
said Richard Larkin, director of credit analysis at HJ Sims &
Craig Elder, senior fixed-income research analyst at Robert
W. Baird & Co, said he was not sure how Detroit would be able to
sell debt unless it was insured. The city already defaulted on
payments due to bondholders of its pension and general
obligation debt, leaving bond insurers to make the payments.
The yield on some Detroit general obligation bonds spiked to
the highest level since November, at 7.8 percent, in
secondary-market trading on Friday. A year ago, two months
before Orr was appointed by Michigan's governor to restructure
Detroit's finances, the bonds yielded 5.12 percent, reflecting
greater confidence among bond investors.
Orr presented the proposed debt adjustment plan, required as
part of its Chapter 9 municipal bankruptcy, earlier this week on
a confidential basis. He still is at odds with pension funds
over how large a cut they should take.
On one key aspect, the city's controversial interest-rate
swaps deal with investment banks Merrill Lynch Capital Services
and UBS AG, the city declares the contracts as a disputed claim
and does not include them as part of the settlement plan.
The city also reserves a right to protect its share of taxes
on casino revenues from any claims by the two investment banks.
The revenue had been pledged as collateral for the swaps.
Different classes of creditors are offered a wide range of
options. The proposal allows holders of some classes of general
obligation bonds full repayment of their claims against the
city. Some holders of $1.45 billion of debt sold in 2005 and
2006 to fund the city's pensions would receive only 40 percent
of the face value of their securities, plus a share of new notes
issued by the city.
Specifics of the city's plan for reduction in pension
benefits are not detailed in the copy of the proposal obtained
by Reuters. The plan includes language about concessions, but in
many places, dollar figures are left blank.
Jordan Marks, executive director of the National Public
Pension Coalition, criticized the plan's treatment of public
"If the city fails to pay the pension funds anything short
of what they are owed, it will mean painful cuts for
firefighters, police officers, and thousands of other municipal
workers, who earn an average $19,000 per year in retirement," he
said. "Big banks, however, will feel little pain as Wall Street
posted record profits in 2013."
Barry HoAire, portfolio manager of Bel Air Investment
Advisors, in Los Angeles, said bondholders may oppose the
favored treatment of pensions. "It's clear they're proposing a
more favorable outcome for pensioners," he said. "There is going
to be a lot of back-and-forth, and I just don't think this is
going to be accepted by bondholders.
The city makes clear that it intends to move forward even if
it cannot win agreement from all classes of creditors. In a
so-called "cramdown" provision, Detroit asks bankruptcy Judge
Steven Rhodes to approve the plan even "in the event that any
impaired class does not accept or is deemed not to accept the
Bill Nowling, a spokesman for Orr, did not respond to
requests for comment.