Bankruptcy In The USSA: Detroit Bondholders About To Be GM'ed In Favor Of Pensioners
First, the Obama administration showed during the course of the GM and Chrysler bankruptcy proceedings, that when it comes to Most Preferred Voter classes, some unsecured creditors - namely labor unions, and the millions of votes they bring - are more equal than other unsecured creditors - namely bondholders, and the zero votes they bring. Five years later we are about to get a stark reminder that under the superpriority rule of a community organizer for whom "fairness" trumps contract law any day, it is now Detroit's turn to make a mockery of the recovery waterfall. As it turns out, bankrupt Detroit is proposing to favor pension funds at roughly double the rate of bondholders to resolve an estimated $18 billion in long-term obligations, according to a draft of a debt-cutting plan reviewed by The Wall Street Journal.
The breakdown to unsecured stakeholders would be as follows: 40% recovery for pension funds, 20% for unsecured bondholders - all this to the same pari class of unsecured creditors. Because just like in Europe when cashing out on CDS in insolvent nations is prohibited as it would suggest that the entire Eurozone experiment is one epic farce, regardless of how much "political capital" Goldman Sachs has invested in it, so in the US municipal creditors are realizing that in the worst case scenario, they will be layered first and foremost by all those whose votes are critical in keeping this crony administration in power.
According to the WSJ the plan calls for recovery to be divided among the unsecureds amounting to $4.2 billion, more than the originally planned $2 billion to settle claims which included about $11 billion in unsecured debt, including $6 billion in health and other benefits for retirees; $3.5 billion for retiree pensions; and about $530 million in general-obligation bonds.
There is a possibility that final "math" in the Plan of Reorg is changed before the final draft.
It was unclear from the plan reviewed by the Journal whether the city is using all of the same estimates for the money owed to unsecured creditors in its draft plan. A person familiar with the draft plan said the recovery rate for the pension funds could end lower than the balance sheet shows.Details of the plan sent to creditors on Wednesday have been kept under wraps as the city and its debtholders continue to talk in closed-door mediation. The city sent its working draft to creditors in the hopes that the plan with a richer payout might spur some of them to settle with the city individually or, in the least, offer their own suggestions toward modifying the overall proposal, according to another person familiar with the matter.The formal plan is expected to be filed in federal court in Detroit within two weeks, officials said. Creditors will vote on the plan, but the final decision rests with the court.
Still, the probability is that Kevyn Orr has finally gotten cold feet on playing hard ball with the unions. "The proposed plan provides the road map for all parties to resolve all outstanding issues and facilitate the city's efforts to achieve long-term financial health," Detroit Emergency Manager Kevyn Orr said in a statement Wednesday. Mr. Orr's spokesman declined Thursday to comment on the plan's details. Several creditors, who were opposed to the city's early plans to offer creditors, including bondholders and pension funds, less than 20 cents on the dollars owed to them, also declined to comment."
One can only imagine the amount of "Steve Rattnering" that must have gone on behind the scenes, and how much more is still set to happen, for such a skewed plan to pass the bankruptcy judge over creditor objections. Which it will once the president makes a phone call.
Then again, with contract law abrogated as was made very clear with this administration's first steps into the "Fairness Doctrine" back in 2009 and the bankruptcy of GM and Chrysler, nothing can, or should, surprise one any more.
http://www.bloomberg.com/news/2014-01-31/detroit-bankruptcy-exit-plan-favors-pensioners-over-bondholders.html
Detroit’s pensions would get more than twice what creditors who loaned the city money for those funds would receive under a proposal to restructure its $18 billion of debt.
The draft plan given to creditors this week by Emergency Manager Kevyn Orr offers different recovery rates for classes of unsecured creditors. Pension funds would get 45 to 50 cents on the dollar, though retiree health-care liabilities would recoup just 13 cents, according to the plan.
The record municipal bankruptcy may set precedents in how retirees and bondholders are prioritized when a locality falls into distress. Investors in the $3.7 trillion municipal-debt market have assumed that states and cities would raise taxes as high as necessary to make full payments on general obligations.
Orr’s plan, reported earlier by the Wall Street Journal, makes clear that unsecured creditors, with $9.2 billion in claims, would be treated differently in the bankruptcy, which came after the one-time industrial giant was unable to pay bills or provide adequate services. The proposal was given this week to creditors for feedback, as Orr prepares to submit a restructuring plan to federal bankruptcy court.
“If you’re a bondholder in the state of Michigan, every pledge should be viewed as a subordinate pledge going forward,” said Adam Mackey, head of munis at PNC Capital Advisors LLC in Philadelphia. “Ultimately you’re going to see Michigan debt be penalized.”
Saving Masterworks
Loans of $1.4 billion made to shore up two pension funds would receive 20 percent of their claims, under Orr’s plan. Investors holding $369 million in unlimited-tax general obligations would recover about 46 percent, and $161 million of limited-tax debt would get 28 percent.
Payments would rise slightly if the city leases its water-and-sewer system to a new operator, netting $1.5 billion over 40 years.
The plan assumes an infusion of $700 million for the two pension systems from equal contributions by the state and private foundations. To protect the city’s collection of art masterworks, foundations and the Detroit Institute of Arts have pledged $470 million. Republican Governor Rick Snyder has proposed $350 million that the legislature must approve.
Stiffing Banks
The deal to protect pensions and the art works was panned by Fitch Ratings, which this week labeled it an “us versus them” mentality in Michigan by favoring retired state workers over bondholders.
The city has also proposed paying nothing to Bank of America Corp. and UBS AG (UBS), who hold secured,interest-rate swaps that have cost taxpayers $202 million since 2009. The city says it disputes the legitimacy of the swaps but may set aside about $4.2 million a month in a reserve fund in case a court finds them legal.
Bondholders would be repaid in the form of 30-year notes with a 5 percent interest rate.
Under the U.S. Bankruptcy Code, similar creditors are normally treated the same, which means that giving the pension funds more money than unsecured bondholders may be difficult to justify to a judge. There are ways around the general rule, however, bankruptcy attorneys say.
Orr’s latest plan increases money going to unsecured creditors compared with an offer he made in June, before the city filed for bankruptcy protection. That proposed treating pension funds and bonds the same, both getting pennies on the dollar.
‘Painful Cuts’
While paying a better rate to pension claims, Orr’s plan would result in “painful cuts” to retirees which average $19,000 for those in the general employee system, said Jordan Marks, executive director of the Washington, D.C.-based National Public Pension Coalition.
“While Detroit’s communities would fall further behind, big banks will feel little pain as Wall Street posted record profits in 2013,” Marks said in an e-mailed statement.
Orr’s plan also would create an independent trust for retiree health care, called a Voluntary Employees Beneficiary Association. The trust for current and future retirees would receive the $524 million to be paid under the settlement with unsecured creditors.
January 31, 2014 at 7:47 pm
Detroit wins retiree health care concessions;
barriers to water deal remain
The suburbs would control a new regional water system, according to a copy obtained by The News. (Brandy Baker / The Detroit News)
Detroit— The city won steep health care concessions from retirees Friday but remained far apart with suburban leaderson a nearly $2 billion water department deal that could help finance bankrupt Detroit’s restructuring.
The developments emerged as the public got its first peek at a leaked plan to reduce the city’s $18 billion in debt and end the biggest municipal bankruptcy case in U.S. history.
The preliminary plan prescribed cuts to various groups of creditors, including pensioners and bondholders. The 99-page plan also provided new details about the price Detroit’s pension funds and the Detroit Institute of Arts would pay to be spared deeper cuts and the possible sale of masterpieces to satisfy creditors.
The proposal’s framework would treat pension recipients more generously than bondholders, but the precise impact to retirees’ bottom line was unclear because the document was missing financial data tied to the disputed health of Detroit’s two pension funds. A person briefed on the document cautioned it is a starting point for negotiations — not the final proposal.
In an apparent attempt to gain creditor support for the plan, the proposal contains scenarios by which pensioners and bondholders could benefit from the conversion of the Detroit Water and Sewerage Department into a cash-generating asset for the city.
But the region’s three county leaders refused to commit Friday to pay $1.88 billion to lease the Detroit Water and Sewerage Department.
“This isn’t just something to jump into because Detroit’s in bankruptcy and we’ve got to hurry,” Macomb County Executive Mark Hackel said.
Also on Friday, the city took legal action in the bankruptcy case to end a troubled $1.4 billion pension debt deal.
The confidential plan surfaced a month before a March 1 deadline for Detroit to secure additional concessions from creditor or force U.S. Bankruptcy Judge Steven Rhodes to implement cuts.
A leading national municipal finance analyst offered a grim review Friday of the city’s plan, saying it appears to be driven by Gov. Rick Snyder’s desire to settle the bankruptcy before September, when the Detroit City Council could legally vote to remove Orr from office.
“The focus seems to be on getting this completed before the November elections,” said Matt Fabian, managing director of Municipal Market Advisors in Concord, Mass.
Fabian, who reviewed the document for The Detroit News, said the plan follows a pattern the city’s lead bankruptcy firm, Jones Day, has displayed in prosecuting the Chapter 9 case.
“The point of these attorneys is to be able to damage the creditors as quickly as possible —that’s really the point of the bankruptcy to date,” Fabian said. “This plan is an attempt to help bully creditors into accepting the Jones Day terms.”
The document also may help the city’s attorneys “regain momentum” after Rhodes twice rejected an early settlement with two big banks, Fabian said.
Fabian said the plan’s treatment of bondholders getting paid pennies on the dollar could leave the city ostracized from the bond market for long-term borrowing for years to come.
And with the city’s casino and property tax revenues still in decline, Fabian said, the city’s finances are not stabilized enough to live without the ability to borrow money for economic development and improving services.
“A plan like this could have the city back in bankruptcy in five years,” Fabian said.
City to collect $47M per year
Under the city’s 40-year proposal for the water department, Detroit would maintain ownership of the utility and collect $47 million a year, which would help pay for retiree pensions and help bankroll Detroit’s revitalization.
“Some of the key areas we’re looking at are that Detroit maintains ownership, a revenue stream back to the city that also is a good deal for rate payers and we hope that pensioners’ rights can also be protected,” Wayne County Executive Robert Ficano said in a statement.
Detroit would be paid $47 million a year for 40 years — $1.88 billion total — and retain ownership of the facilities but would be outnumbered on a new board overseeing the newly created Great Lakes Water and Sewer Authority, according to a preliminary plan of adjustment obtained by The Detroit News.
The board would include two members each from Wayne, Oakland and Macomb counties, two city appointees and one from Snyder.
Detroit would become a wholesale customer of the authority, which would provide water and sewer service to about 4 million customers across southeast Michigan. Currently, Detroit cannot profit from the water department operations.
The impact on rates for water and sewer customers remains unclear.
The $1.88 billion figure is down from the $9 billion price-tag floated to the suburbs last fall. Oakland County officials said they want to see additional savings.
“We’re moving in the right direction,” Oakland County Executive L. Brooks Patterson said. “We’ll see if there’s any more costs that can be cut.”
Patterson said he had not seen the proposal, but is leery about having the suburbs responsible for deferred maintenance, system upgrades and legacy costs.
“So we’re going to take our time and go over all of the details to make sure we don’t make any 40-year mistakes, if you know what I mean,” he said.
Hackel said he remains “confused about the whole process” and that Macomb and Oakland counties may need to hire their own consultants to study the plan.
“If we’re serious about creating an authority, we should do that first,” Hackel said. “And then figure out terms and conditions.”
State Rep. Kurt Heise, a longtime critic of DWSD and former Wayne County environmental director, said Friday the city’s new proposal “is really the best plan I’ve seen so far for the customer communities.”
“Certainly $47 million a year is a lot better than the $200 million a year, which was (Orr’s) original proposal,” said Heise, R-Plymouth, adding the plan would put Detroiters on the same level as suburban users.
“By treating them as regular customers of the system, it gets them to have more skin in the game,” Heise said.
Art would be held in trust
Under the plan, the DIA’s art collection, museum and assets would be held in a charitable trust and remain in Detroit forever, divorced from the whims of city finances and politics.
That effort would be funded by $370 million from 10 regional and national foundations, $350 million from the state and $100 million from DIA donors.
The money comes with strings, though. The city and donors want oversight of the new DIA charitable trust and “appropriate” financial oversight of the city’s pension funds, according to the plan.
Donors also want Michigan Attorney General Bill Schuette to sign off on the plan. Schuette has said he’ll oppose any reductions of pensions in violation of the state constitution, which Rhodes has ruled doesn’t apply in federal bankruptcy court.
Jeff Williams, chief executive officer of Public Sector Consultants in Lansing, said a key hurdle blocking Detroit’s exit from bankruptcy remains convincing the public and philanthropists to approve a plan that would save art, but slash retiree pensions.
“You’re going to approach me to give to art and at the end of the day, I know it’s going to (the pension of) grandma,” Williams said. “That’s a tough sell.”
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