James Spiotto

CHICAGO — Detroit on Friday filed a proposed plan of adjustment with the federal bankruptcy court that offers its general obligation bondholders about 20 cents on the dollar.

The long-awaited adjustment plan lays out how the city hopes the bankruptcy court will treat its $18 billion of debt with the aim of restoring Detroit to solvency.

It offers unsecured non-retiree creditors, including most unlimited-tax and limited-tax GO holders, a roughly 20% recovery on claims. The city would raise the funds to cover the claims through the issuance of new securities. The recovery rate could go up if the city brings in more revenue during the restructuring process.

Unlimited-tax GO bondholders account for $479 million of outstanding debt, while LTGO bondholders account for roughly $547 million. A small piece of the overall GOs will be treated as secured because it benefits from a statutory lien of Michigan aid.

The recovery figure is lower than proposed in a draft plan circulated weeks ago to creditors and obtained by The Bond Buyer. The 20% rate is also far lower than the 75% GO recovery that's been the historical Chapter 9 average since the Great Depression, according to bankruptcy legal expert James Spiotto.

The plan proposes treating the city's interest-rate swap counterparties as secured creditors. A new settlement that's "significantly lower" than previous deals is expected early this week, according to Detroit emergency manager Kevyn Orr. Bankruptcy Judge Steven Rhodes rejected a previous settlement reached with the help of mediation led by Chief U.S. District Judge Gerald Rosen.

The city's treatment of holders of $1.4 billion of pension certificates tied to the swaps is still to be determined. Detroit sued several weeks ago to invalidate the certificates, but indicated in the plan that a settlement outside of court is possible.

Holders of an estimated $5.9 billion of water and sewer bonds, considered secured creditors, would recoup 100% of their principal but would be impaired by changes to bond terms as the city proposes a waiver on call protections to allow for a refinancing of the debt.

In a conference call with reporters Friday afternoon, Orr said the proposed bondholder recovery rates are fair in light of the city's grim circumstances.

"I've been doing this for a long time, 30 years, and I've never entered a case where any unsecured creditor thought their cut was fair," said Orr. "Are they fair? Yes, given the requirements under Chapter 9 .... to restore services. That money has to come from somewhere."

He added that the city is still in negotiations with investors and pension certificate holders to reach a negotiated settlement.

Orr also indicated that bondholder agreement will be required for a so-called grand bargain that brings an additional $820 million of outside funds into the case. The first-of-its-kind plan calls for a group of local and national foundations to contribute $380 million to a fund that would go toward the city's pensions while protecting the art collection of the Detroit Institute of Arts. The DIA would contribute another $100 million. Gov. Rick Snyder is trying to get the Legislature to contribute an additional $350 million.

Under the requirements of the deal, all the funds would have to go to the city's pensioners, and all the creditors would have to sign off before the money will become available, according to Orr.

"They're looking for a global solution," he said. "They're not looking to buy litigation. They're looking to get this thing done."

He said it would be "madness" if the deal were derailed. "I don't know anybody that walks away from nearly $1 billion," he said. Bond insurers and other muni market participants have said the deal severely undervalues the art collection and unfairly favors pensioners over bondholders.

The bankruptcy documents, which include the adjustment plan and disclosure statement, also lay out a 10-year plan to revitalize the city by improving services and public safety after its Chapter 9 closes. The filings propose $1.5 billion be spent on capital improvements, blight removal, equipment and technology upgrades over 10 years with up to $500 million being spent in the next five years.

The adjustment plan and disclosure statement were filed the U.S. Bankruptcy Court for the Eastern District of Michigan. Other details of the plan in the city's disclosure statements include that holders of $8.? million of parking bonds would be repaid in full. Holders of Downtown Development Authority claims estimated at $33.6 million would see 20% recoveries.

Based on the value of pensioners' original claims at the time of Detroit's bankruptcy filing, the recovery rates for the police and fire retirement fund is estimated at 20.8-29.8%, and for general retirement system 27.5-33.3%. The city is promoting in the plan other figures that cast a more positive light on the treatment of pension annuities. Public safety retirees would preserve more than 90% of their "current" annuity and general retirees more than 70% if they agree to a deal with the city and state and give up the value of their annual cost-of-living increases. The recovery rates are three to five percentage points higher with the $820 million DIA plan.

The city was trying to hammer out a final deal to lease its water and sewer system for $1.9 billion to a new regional authority before the plan was released. The lease would mean more recovery for creditors, but it has stalled amid opposition from some suburban leaders. If the lease is completed, the new authority would refinance the debt to achieve savings, a move that would require bondholders waive call protections. The new structure would feature an annual payment to Detroit that comes before debt service.

The city also proposes issuing $526.5 million of notes to pay off its estimated $5.7 billion other post-employment benefits liability. The notes would not pay interest and would mature in 20 years.

On the pension side, the city estimates the unfunded liability to be $3.4 billion, in contrast to the $985 million liability estimated by the two pension funds.

Detroit and its creditors will now likely spend the next 60 to 90 days in negotiations.

The city needs to reach approval from a class of creditors who make up two-thirds of the amount of debt and over half by number. If they reach that number, and Rhodes approves, the remaining creditors would be subject to a cram-down.

Rhodes, who is overseeing the case, had given the city until March 1 to file the plan. Creditors will have 30 days to object to the disclosure statement. The city will ask for votes from creditors once the plan is approved.

Orr originally said Detroit would file the plan by the end of 2013. That date was moved back to mid-January, then February, as the city continued to try to nail down large portions of the plan and negotiate with creditors.

Insurers who wrap the city's unlimited-tax GOs have protested their treatment as unsecured debt. During a hearing Wednesday, Rhodes urged the city and bondholders to spend the next few weeks trying to reach a settlement so that he doesn't have to issue an "all-or-nothing" ruling on the matter.

The city is also expected soon to release details of a new settlement with its two interest-rate swap counterparties. A Detroit attorney told Rhodes Wednesday that the city had reached a new deal with the two banks, UBS AG and Merrill Lynch Capital Services, but did not detail terms. It will be the third settlement the city has reached with the banks. Rhodes rejected the first two, saying the terms were too rich.

A city summary of the plan is available at http://www.detroitmi.gov/EmergencyManager.aspx%20and formal court filings are available at http://kccllc.net/Detroit. Miller Buckfire & Co., Jones Day, Ernst & Young and Conway MacKenzie Inc. are advising to the city on the restructuring. The city made the largest Chapter 9 bankruptcy filing ever on July 18.

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