CHICAGO - Detroit reached a tentative agreement with bond insurer Syncora Guarantee Inc., marking a major breakthrough in the city's bankruptcy.
Syncora would reportedly recover 26 cents on the dollar - up from the city's offer of less than 10 cents ---- in a deal that includes a mix of cash, bonds and city assets, including leases on a downtown parking garage and a 20-year lease extension on a tunnel between Detroit and Windsor, Ontario.
A deal with Syncora would remove one of the last obstacles to Detroit's effort to exit bankruptcy. It was announced at the end of the sixth day of a trial being held to decide if the court will confirm the city's plan to exit bankruptcy by shedding up to $7 billion of debt and reinvesting $1.5 billion over 10 years.
Syncora and Financial Guaranty Insurance Co. were the two major creditors who continued to oppose the plan of confirmation. The insurers cover $1.5 billion of pension certificates of participation that Detroit wants to either void as illegal or to settle by paying less than 10%.
Syncora's exposure is $390.6 million, including $329 million of the certificates and $34.8 million of unlimited-tax general obligation bonds. The ULTGO bondholders settled for 74% cents on the dollar several months ago.
FGIC and the hedge funds that hold the COPs may now be the last major creditors fighting the bankruptcy plan.
Syncora and Detroit filed a court brief late Tuesday asking U.S. Bankruptcy Judge Steven Rhodes to suspend the trial until Sept. 12 to give the parties time to finalize the deal.
"We also note for the court that if this agreement is finalized within this time period as we expect, it will profoundly alter the course of the proceeding and the litigation plans of the remaining parties," the brief said. The two sides told Rhodes they need "48 hours to address certain conditions and logistics."
Rhodes said Wednesday he would delay the trial until Sept. 15.
The extension also gives FGIC time to review the deal, as requested by its attorney at the Wednesday morning hearing. FGIC's Alfredo Perez said he wanted until Monday to consult with his client and review the new documents. "We read it twice and are still having a hard time understanding it," Perez told the judge, according to local reports from the courtroom. After granting the request and ending the hearing, Rhodes asked Perez to join him in his chambers.
Also during the hearing, a Syncora attorney told Rhodes that the insurer is hopeful of reaching a deal with UBS and Merrill Lynch. "The intended result is not just a partnership for plan confirmation, but a partnership for the future of Detroit," Syncora attorney Ryan Bennett said.
Key to the Syncora deal is agreement from UBS and Bank of America Merrill Lynch, which are counterparties on roughly $230 million of interest-rate swaps that Syncora insures, to release the insurer from any responsibility for the swaps.
It's not clear whether the banks have agreed to the deal.
Limited-tax general obligation bondholders and retirees, whose settlements include a provision that they would win more money if the city successfully repudiates the $1.5 billion of COPs, would also need to agree to drop that provision, according to a source close to the deal.
The city and Syncora hope to resolve both conditions by Friday, or the deal could fall through and the court battle resume.
The deal would give Syncora, which owns American Roads, a firm that operates the city's half of the Detroit-Windsor Tunnel, an extension of the tunnel lease until 2040. The lease currently expires in 2020. Syncora would also be given a 30-year lease of a downtown parking garage in return for investing $13 million in capital improvements.
The insurer would get roughly $30 million in cash.
Syncora gained control of tunnel operator American Roads last year when the company went bankrupt and gave the lease to the insurer to settle swaps liabilities.
The two sides began battling even before Detroit filed for bankruptcy last July over the interest-rate swaps and the city's move to default on, and later repudiate, the COPs.
Last week, during the confirmation trial and under direct questioning from Rhodes, a Syncora attorney said the firm was fighting for a 75% recovery.
The announcement came the same day Detroit announced an agreement with three counties to create a new regional authority to take over the troubled Detroit Water and Sewerage Department. Spinning off the DWSD and reaching a settlement with Syncora would resolve two of the last major pieces of the city's effort to exit bankruptcy by October.
