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Detroit Files for Biggest Municipal Bankruptcy to Date

CHICAGO — Detroit filed for Chapter 9 bankruptcy Thursday.

It's a historic move that marks the largest municipal bankruptcy filing to date. It's a first for Michigan, and the first time a state's largest city has filed.

The announcement was not unexpected, as emergency manager Kevyn Orr, a corporate bankruptcy attorney brought in by Gov. Rick Snyder to run the city in March, has repeatedly warned that Chapter 9 was a strong possibility.

Snyder and Orr will hold a press conference Friday morning.

The filing launches a 30- to 90-day process that will determine whether the city is eligible for Chapter 9 protection.

"Hopefully it will be a step in the right direction," James Spiotto, a bankruptcy attorney with Chapman and Cutler LLP, said. "The challenge is not just the adjustment; the challenge is the recovery plan," he said. "If you just lower the debt, and don't solve the systemic problems, I don't know how much you've solved."

The filing came nearly four weeks to the day after Orr unveiled a controversial plan to restructure the city's debt, which he estimates at $18 billion.

Orr recommended the filing to Snyder on Tuesday, according to the bankruptcy petition. Snyder said in a late Thursday afternoon conference call with reporters that he took a few days to think about it and meet with Orr, and then "decided it was time to move forward."

"Enough is enough for the downward spiral of Detroit," Snyder told reporters.

He said at the time that he would negotiate with creditors for roughly a month before deciding whether to file. Orr's plan stunned the muni market by lumping in the city's general obligation bonds with its lowest-secured debt, such as retiree health care costs.

Orr proposed issuing $2 billion of notes to pay off $11.4 billion of unsecured creditors, including the holders of GO debt characterized as "unsecured."

Many thought Orr's $2 billion repayment plan represented an opening bid to creditors, but it appears the city did not stray from the figure. Many market participants have opined that a bankruptcy battle would be preferable to Orr's restructuring plan.

Orr has about 16 months left as emergency manager under the state's law for distressed local governments, which limits a manager's tenure to 18 months unless the local officials vote to keep them in office. It's unlikely that will be enough time to get through the bankruptcy.

"Generally Chapter 9 is measured by years, not weeks or months," Spiotto said. "Vallejo took three years and that's a far smaller city."

Orr, however, said his goal is to have Detroit emerge from Chapter 9 by late summer or early fall.

If the city is approved to go into bankruptcy, the process will litigate a myriad of issues that have already dogged negotiations, including Orr's treatment of unlimited-tax GO bonds as unsecured and the state's constitutional protection of pensions.

On Wednesday, the two retirement systems sued Orr and Snyder to block a Chapter 9 filing that would impair the city's pensions. A hearing on that case was set for Monday, but a bankruptcy filing will put a hold on all related litigation.

Orr reportedly reached a settlement with only one set of creditors -- the two counterparties on the city's interest-rate swaps, considered among the city's most-secure debts. The settlement, reportedly reached Monday, would give Bank of America and UBS AG 75 cents on the dollar, while allowing the city access to $15 million a month in casino revenues, and ending escalating lawsuits between Detroit and bond insurer Syncora Guarantee Inc. over the casino revenues.

A bankruptcy could be complicated by the retirement system's lawsuit as well as others that seek to block a Chapter 9 filing, said Frank Shafroth, director, Center for State and Local Leadership at George Mason University.

"Many believe that federal bankruptcy protection would strengthen the city's ability to execute the restructuring, provided Mr. Orr and his team can get a bankruptcy judge to agree," Shafroth said in an email to The Bond Buyer. "To some degree, there is a non-Detroit casino gamble at stake for both sides: is Mr. Orr's plan to swap $2 billion of 'nonrecourse participation notes' for $11.45 billion in unsecured claims, a payout that equals less than 20 cents on the dollar, better than bringing in a federal bankruptcy judge to act as a single referee?" he said.

Snyder told reporters that the federal bankruptcy's single-forum process would benefit the city.

"It will give us one coordinated central place to do this, and to work with creditors in an organized fashion to say 'here's the debts that realistically can't be paid,'" he said. "Bankruptcy can be a positive."

Snyder added that cleaning up city government and its debts are the "last obstacle to breakout growth" in Detroit.

The governor, who was required to authorize the filing under state law, said in the bankruptcy petition that some may consider it a low point in the city's history but that it is actually the only feasible path for the city.

"The city's creditors, as well as its many dedicated public servants, deserve to know what promises the city will keep," Snyder said in the petition.

"The only way to do those things is to radically restructure the city and allow it to reinvent itself without the burden of impossible obligations. Despite Mr. Orr's best efforts, he has been unable to reach a restructuring plan with the city's creditors," the petition says. "I therefore agree that the only feasible path to a stable and solid Detroit is to file for bankruptcy protection."

The petition cover sheet is signed by Orr and attorney David Heineman of Jones Day. The petition lists other Jones Day attorneys based in Ohio and California and Detroit attorneys from Miller Canfield Paddock and Stone as representing the city in its petition, City of Detroit, case number 13-53846, filed in U.S. Bankruptcy Court for the Eastern District of Michigan in Detroit.

Yvette Shields and Kyle Glazier contributed to this story.

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Wilson White

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Posted by wwilson | Monday, July 22 2013 at 12:51PM ET
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