Detroit Judge Questions Orr on Land Value in FGIC Deal

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Kevyn Orr, emergency manager for Detroit, speaks at a news conference in Detroit, Michigan, U.S., on Tuesday, Dec. 3, 2013. Detroit can remain under bankruptcy court protection, where it's shielded from lawsuits or other actions that might interfere with its attempts to reduce debt and cut employee benefits. Photographer: Jeff Kowalsky/Bloomberg *** Local Caption *** Kevyn Orr

CHICAGO — More details on Detroit's settlement with bond insurer Financial Guaranty Insurance Co. emerged Tuesday as the federal trial on the city's debt-adjustment plan headed into its final day.

Detroit emergency manager Kevyn Orr and an Ernst & Young financial consultant offered additional details into the city's deal with FGIC, which was reached last week after weeks of negotiation. FGIC had been the city's last major holdout creditor, and the proposed settlement is expected to ease the city's exit from bankruptcy.

The FGIC settlement features cash as well as the site of the Joe Louis Arena, where the Detroit Red Wings play. The site, located on prime riverfront Detroit land adjacent to the convention center, will be developed by the insurer into  a 300-room hotel with condominiums and retail space after the arena is demolished when the hockey team moves to a new bond-financed arena elsewhere in Detroit.

Under the cash part of the deal, FGIC is expected to recover 13% on its $1.1 billion claim, getting $141 million from proceeds of a note issue and $20 million in settlement credits.

U.S. Bankruptcy Judge Steven Rhodes asked Orr to estimate the monetary value of the real estate portion of FGIC settlement, according to local reports from the courtroom.

"Ultimately I'd like you to testify either what the value of the real estate is FGIC has an option to acquire here, or tell me the city doesn't think it's necessary for the court to have that to determine the reasonableness of the settlement," Rhodes said.

After taking a break to confer with his attorneys, Orr came returned to the stand and said the Joe Louis Arena currently had either no value or even "negative" value, and that its worth would only be realized after it was demolished and the new project built.

"[T]he city's position is that the costs associated with attempting to market all of that property either equals or exceeds what the city could sell it for in the market?" Rhodes asked.

"Yes," Orr said. "Because you have to demolish it. You have to remediate it, so that's true, your Honor."

Orr described the FGIC settlement as a "peace accord, more or less" that the city felt would bring some certainty to the bankruptcy exit process.

As part of the agreement, Detroit will drop a lawsuit it launched in January seeking to invalidate the $1.5 billion of certificates of participation insured by FGIC and Syncora Guarantee Inc.

Orr said the move would save the city a lot of legal fees.

"This was going to take several years," he said of the lawsuit. "I anticipated that it was going to be complex, both factually and legally."

If FGIC had succeeded in its countersuit on the COPs or on its objection that the city's plan unfairly discriminated against it, then Detroit would have had to "hit the rest button and go back to plan development," Orr said. "It would have been fairly catastrophic from my perspective."

The Detroit City Council is expected to vote Wednesday or Thursday on the FGIC deal. It has already signed off on the Syncora settlement. The FGIC settlement was crafted under the state's emergency management law, so even if the council rejects it, officials can go to the state emergency loan board for its approval.

Also Tuesday, Ernst & Young consultant Guauray Malhotra testified that he believes the city's cash position in the future will be "sufficient" to operate and meet its debt obligations.

Malhotra also noted that the city's planned exit financing issue with Barclays is now likely to be $275 million, down from $325 million. "It is the city's view to borrow less because of the overall cost of that financing that has to eventually be paid," he told Rhodes.

Martha Kopacz, an independent financial expert hired by Rhodes to review the feasibility of the plan, is expected to testify Wednesday. That is expected to be the last day of the trial, with closing statements set to begin Oct. 27.

Rhodes outlined several issues he wanted to see addressed in the city's closing arguments. The judge told Detroit's lead attorney, Bruce Bennett from Jones Day, that he wants the attorney to discuss the section of the federal bankruptcy code that addresses the "reasonableness of fees," and "how it can work here."

Bennett should also specifically note which settlements the court is being asked to approve and whether the court needs to approve the city's exit financing, Rhodes said.

"I'd like you to spend as much time as you think is necessary on the issue of the justification for the discrimination among the classes of unsecured creditors," the judge said. "At the same time, however, while you do that, I want to indicate to you that I'm less concerned about the numerator and denominator than I am about the business side, the business justification side of that analysis."

Rhodes is expected to rule on the plan late in the week of Nov. 3.  

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