CHICAGO — Detroit filed a flurry of court papers late Thursday in support of its historic Chapter 9 request, including an outline of creditor negotiations that contends the lack of representation and organization among creditors, including bondholders, made it impossible to reach settlements.
Among the filings is a listing of the city's top unsecured creditors and an 88-page declaration by Detroit emergency manager Kevyn Orr detailing the city's insolvency and its failed attempts to negotiate with creditors.
Orr says the city tried to negotiate in good faith with its creditors but was frustrated on various levels. A chief barrier was the "fragmented and often non-binding nature of these negotiations," Orr said in the filing.
The document features details of creditor meetings, including the lengths of the meetings — at times up to five hours — and creditors' main questions, many of which related to Orr's treatment of the city's general obligation bonds as unsecured, a list of city assets, and future revenue estimates. It says the city repeatedly welcomed any counterproposals that "were consistent with the city's current and projected financial condition," but does not include any figures.
The filing concludes that the city's creditors total "many tens of thousands," including many that are still unknown or unidentified, and that many of the representatives, including unions and bond insurers, are not legally able to negotiate on behalf of individual creditors.
On the bond side, certain series of debt allow a majority of bondholders to agree to amendments in terms, according to the filing. But for much of the debt, Orr says, the city was not able to negotiate with "a single contact with the authority to bind bondholders of a particular series of debt, thus rendering negotiations regarding the out-of-court restructuring of such bonds impracticable," according to the filing.
For several bond series, either U.S. Bank acts solely as a paying agent, and not a trustee, or the debt is uninsured, such as with a chunk of its 2008 bonds. In other cases, the debt may be insured, but the insurer has no so-called control rights, if it has not yet made a payment under its respective policy, such as with bonds issued in 1999 and 2003.
"To date, no bondholder group holding a majority of any of the 60 series of debt issued by the city has organized so that the city could negotiate with it," Orr said in the filing. "In many, if not all, cases, an extension of the maturity date of the indebtedness or an agreement to reduce its principal amount requires the consent of all outstanding bondholders," the filing says.
The city also notes that many creditors resisted Orr's proposal to restructure the debt. City employees filed multiple lawsuits challenging the state and Orr's legal authority to impair benefits. Ambac Financial Group, which insures $170 million of Detroit GO debt, in early July issued a public statement saying Orr's restructuring plan is harmful to the city and imperiled its access to capital financing.
"The feedback received from creditors has led the city to determine that such a comprehensive agreement is unlikely in the near term or without this filing," Orr said. "Further negotiations with all of the city's various stakeholders is impracticable in light of the city's cash crisis and the urgent need to move forward with its restructuring. The city requires a clear and centralized forum within which parties may negotiate and ultimately be bound."
The list of top 20 unsecured creditors is led by the city's two retirement systems, with unfunded pensions totaling $3.5 billion, followed by U.S. Bank, which is the paying agent and trustee on $1.4 billion of defaulted pension certificates as well as the bulk of the unlimited-tax and limited-tax general obligation bonds, and the Downtown Development Authority, with $34 million of outstanding debt.
