November 7, 2014 / 6:00 AM / in 5 years

Detroit's dash through bankruptcy awaits court nod

Nov 7 (Reuters) - Detroit’s nearly 16-month odyssey through bankruptcy reaches the finish line on Friday, when a federal judge will issue his ruling on whether the city’s plan for shedding debt and investing in its future is both feasible and fair.

U.S. Bankruptcy Court Judge Steven Rhodes could approve the entire plan put forward by the city’s emergency manager, Kevyn Orr. He also could send the plan back for partial revision. An all-out rejection, while possible, is not widely expected.

“I don’t think (Rhodes) will throw it all out,” said James Spiotto, managing director of Chapman Strategic Advisors in Chicago and a municipal bankruptcy expert. “He might ask for clarification or adjustments.”

The feasibility of Detroit’s plan is expected to occupy most of the court’s attention during a proceeding scheduled to begin at 1 p.m. EST (1800 GMT) on Friday. Most of the fairness questions appear to have been answered with the settlements Detroit reached with major creditors, including bond-insurance companies and public employee pension funds.

Court-appointed expert, Martha Kopacz, testified the city’s plan is feasible. But she said the relatively fast pace of the city’s case may have produced more generous terms for creditors and pushed Detroit “to the skinny end of feasibility.”

Kopacz, a senior managing director at Phoenix Management in Boston, also said Detroit was “at the edge” of its ability to repay $275 million the city plans to borrow to finance its exit from bankruptcy.

The plan to shed about $7 billion of Detroit’s $18 billion of debt includes $1.7 billion of reinvestment initiatives through 2023. Those would be funded in part by improved revenue and cost savings.

Spiotto said the $1.7 billion “may turn out to be a drop in the bucket,” as Detroit’s needs over the next decade would likely eclipse that amount.

Michael Sweet, bankruptcy attorney with Fox Rothschild in San Francisco, said Detroit will need to succeed with efforts to revitalize. “They have to get people to come back and stay and feel safe and secure,” he said. “The city needs to prove it’s back.”

In reaching his decision, Judge Rhodes can draw on thousands of exhibits and hours of testimony from Orr, Mayor Mike Duggan, pension actuaries, and others during a confirmation hearing that started Sept. 2 and concluded Oct. 27.

The biggest-ever municipal bankruptcy began on July 18, 2013 with major creditors girding for battle and has wound down in a flurry of settlements. A so-called “Grand Bargain” taps into $816 million from foundations, the Detroit Institute of Arts and the state of Michigan to ease pension cuts and protect city-owned art work from sale. Two companies that guaranteed payments on Detroit bonds, Syncora Guarantee Inc and Financial Guaranty Insurance Co, received options to develop parcels of land.

Judge Rhodes has signaled support for the settlements, noted Juliet Moringiello, a professor at Widener School of Law in Harrisburg, Pennsylvania. “There would have been clearer signals all along if this isn’t good enough,” she said.

Meanwhile, consultants and law firms have billed Detroit $140 million, with Orr’s former law firm, Jones Day, billing the most at $52.3 million through Oct. 24.

Rhodes has mentioned the possibility that the city could turn to mediation or even litigation over its bankruptcy-related fees.

The costliness alone may deter other fiscally troubled cities from filing for bankruptcy, Spiotto said. “It’s the wake-up call for other municipalities. Don’t let it go too far,” he said. (Reporting by Karen Pierog in Chicago, Tom Hals in Delaware and Lisa Lambert in Washington; Editing by David Greising and Lisa Shumaker)

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