CHICAGO — Bond insurer Syncora Guarantee Inc. filed an objection Wednesday to Detroit's effort to repair its notoriously broken down streetlight system by issuing bonds backed by the city's utility tax.
The lighting plan sets up a new bond-issuing authority that is allowed to borrow up to $160 million of bonds to finance upgrades. Detroit's plan, filed with the bankruptcy court on Oct. 23, calls for the Michigan Finance Authority to privately place the debt with Citibank NA, and lend the proceeds to the authority.
The structure includes an intercept feature that places all utility tax revenue with a trustee, who will set aside debt service payments.
Detroit said it believes it does not formally need the approval of the bankruptcy court, but that Citibank or any other purchaser will not close the deal without court approval.
The city in its court filing asked the court to clarify for the bond purchaser that the pledged utility tax revenue will no long constitute property of the city and that the city will have no further claim to the pledged revenues — though the trustee will continue to disburse back to the city all pledged revenues in excess of $12.5 million a year.
The city's utility taxes typically generate $40 million a year.
"The PLA Transaction represents the city's best (and perhaps only) opportunity to remedy this public safety concern," Detroit attorneys argued in the filing.
But Syncora, one of the city's main creditors, filed an objection to the plan Wednesday, arguing that it lacks detail and does not prove that the financing is the "best (and perhaps only) opportunity" for the city.
Syncora said the proposal should be introduced as part of a larger plan of adjustment, assuming the city is allowed to formally enter into Chapter 9.
The lighting plan, the bond insurer argued, illustrates Detroit's generally flawed approach to Chapter 9, treating it as a way to rebuild the city rather than to adjust its debts.
"Well before the city filed its bankruptcy petition, it embraced the idea that Chapter 9, first and foremost, is a public revitalization process ? not a process to allow the city to provide essential services while minimizing creditor loss, as legislative history and case law dictate," the insurer argued in its opening sentence to its limited objection brief.
"While there is no question that the city of Detroit faces many challenges, the means by which these challenges are addressed must be integrated into the overall purpose of Chapter 9, which focuses on fairly adjusting the debts of the city's creditors."
The plan to tap a utility tax to spend $12.5 million a year on upgrades doesn't explain why the city needs to pledge the entire utility tax, which generates roughly $40 million a year. The city will also have to pay $11 million or more in annual operating costs, the motion says.
"[T]he motion is yet another attempt by the city to push through a public reinvestment initiative that would be more appropriately addressed at the plan of adjustment stage," Syncora says. "By operating outside the plan of adjustment framework, the City is attempting to avoid many of the procedural and substantive plan confirmation requirements that are designed to protect creditors from precisely this type of transaction — which then requires creditors to respond to protect their rights. If the City would instead negotiate with its creditors towards a holistic solution (i.e., a mutually-agreeable plan of adjustment) — as opposed to these contested piecemeal proposals that lack the requisite detail this case would proceed more quickly and on a more consensual basis."
A hearing has been set for Nov. 14 to consider the motion.
The plan to repair Detroit's lighting system — nearly half of its streetlights reportedly don't work — began more than a year ago and required passage of a new state law. Emergency manager Kevyn Orr signed an order creating the Public Lighting Authority less than two months into office.
Syncora is also the lead objector to the city's effort to reach a settlement with counterparties on its interest rate swaps.
