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By Karen Pierog
June 26 Bond insurer Syncora Guarantee Inc has
emerged as Detroit's chief nemesis in the city's historic
bankruptcy case and is fighting as if its financial life depends
on a decent recovery on its $400 million exposure to the city.
Since Detroit filed the biggest municipal bankruptcy in U.S.
history last July, Syncora has objected to the city's moves
nearly every step of the way - from an early agreement with
investment banks over interest rate swaps to the more recent
"grand bargain" designed to save the Detroit Institute of Arts.
The company's latest pleading, set for argument Thursday in
a federal courtroom, demands information on the current assets
and income of all Detroit's retired workers - some 20,000 of
Syncora has issued past warnings to investors that it might
go out of business, and it cautioned in a recent financial
report that investment in Syncora Holdings common shares is
"likely to result in a loss of substantially all of their
In the financial statement, Syncora warned of a "liquidity
mismatch" in which claims might exceed recoveries from the
claims, and noted that reserves for losses "are modest" when
compared with estimated future claims.
With so much at stake, Syncora has filed a steady stream of
objections to Detroit emergency manager Kevyn Orr's carefully
synchronized effort to emerge from bankruptcy this fall.
The bond insurer has raised questions about the bankruptcy
court's conduct. It has sent subpoenas to
Michigan Attorney General Bill Schuette; Roger Penske, chief
executive of Penske Automotive Group Inc., and Daniel Gilbert,
the co-founder of Detroit-based Quicken Loans.
It also has objected to the "grand bargain" in which
philanthropic foundations and the state of Michigan have pledged
millions of dollars to ease pension cuts on city retirees and
protect parts of the Detroit Institute of Arts' collection from
Judge Steven Rhodes, who is overseeing the Detroit
bankruptcy case, will hear motions to block several Syncora
demands, including the request for retirees' financial
"The only possible explanation for this outrageous request
is that Syncora is attempting to gain a litigation advantage by
harassing, oppressing and embarrassing the city and its
retirees," the city stated in its motion urging the judge to
deny Syncora's demand.
James H.M. Sprayregen, a partner at Kirkland & Ellis who
represents Syncora, said Syncora's request is reasonable given
the city is citing the greater economic harm to retirees versus
financial creditors for justifying the disparate treatment of
those creditor groups. He added that Detroit's plan will not win
confirmation from Judge Rhodes because it does not meet a
standard under Chapter 9 bankruptcy law that all similarly
situated creditors must be treated fairly.
"We think (Detroit) proposed a patently unconfirmable plan,"
In a filing Monday, Syncora accused Detroit of playing
politics in its bankruptcy case.
"Chapter 9 bankruptcies are a tempting place to break out
the torches and pitchforks and pursue the city's lenders through
the streets," Syncora's filing said. "It is a time-honored and
politically-popular approach. But the bankruptcy code deplores -
and forbids - a city from favoring one class while showing
animus and unfairness to another."
Syncora's beef with Detroit centers on the company's
insurance policy on some of the city's $1.4 billion of taxable
city pension debt, as well as swaps deals Detroit used to hedge
interest-rate risk. Guarantees offered by XL Capital Assurance,
Syncora's predecessor company, enabled Detroit to sell its debt
with a stellar triple-A-rating to investors, including European
When Detroit defaulted on the debt in June 2013, it left
Syncora and another insurer, Financial Guaranty Insurance Co, to
pay bondholders. Syncora and FGIC both have seen their financial
conditions crumble since the 2008 financial crisis.
Like other bond insurers, Syncora had exposure to
mortgage-backed securities, a market that collapsed. Standard &
Poor's in 2010 stopped rating the company and Moody's Investors
Service followed suit in 2012.
In addition to Detroit, Syncora in its financial filings
lists "significant exposure" to Puerto Rico, an ailing muni
issuer, and Syncora also insured some debt issued by Jefferson
County, Alabama - the biggest-ever Chapter 9 case prior to
Regulators in 24 states have yanked Syncora's license to
insure debt, and the last time Syncora insured new muni debt was
in 2008, according to Thomson Reuters data.
Sprayregen said Syncora is facing a near-total loss on its
Detroit exposure, a circumstance that motivates its hard fight.
"Our recovery is virtually nothing, so anybody who portrays
what we're doing as irrational isn't really understanding the
situation," Sprayregen said. "If you're offered nothing, what
choice do you have but to object?"
Stephen Selbst, a bankruptcy attorney with Herrick,
Feinstein in New York, said Syncora may be seeking to maneuver
Detroit toward settlement.
"If you're a holdout creditor, doing everything you can to
make everyone else miserable is an old-fashioned strategy and
the core of that is make it so uncomfortable for the debtor that
they want to come to the table and settle," he said.
(Reporting By Karen Pierog, additional reporting by Tom Hals
and Lisa Lambert, Editing by David Greising and Ken Wills)