CHICAGO — Bondholder recoveries would shrink even further under the revised plan of debt adjustment Detroit filed with the bankruptcy court Monday evening.

The city's original plan, submitted Feb. 21, proposed recoveries of 20 cents on the dollar for holders of the city's unlimited- and limited-tax general obligation bonds.

That has fallen to 15 cents on the dollar under the revised document. The fresh cut represents an 85% haircut.

The city attributed the change in the recovery rate to adding two more classes of unsecured impaired creditors for other post-employment benefits claims as it has shifted course in how it plans to deal with retiree healthcare.

"These new classes will be treated just like the other unsecured creditors and will participate" in the city's proposed $2 billion note issuance, said city emergency manager spokesman Bill Nowling. "Previously, the city proposed dealing with the unfunded OPEB liabilities by getting out of the business of retiree health care. But the Retiree committee objected and said such a move created an impairment. The Retiree Committee had asked the judge to create two separate Opeb classes and the city decided to agree to that request without going litigating it.  Now the amount of impairment and proposed recovered must be added to the total amount that would participate in the $2 billion note.  That lowers everyone's proposed recovery."

The high-profile plan of adjustment lays out how the city wants to treat its estimated $18 billion of debt as it tries to exit the nation's largest ever municipal bankruptcy by October 2014.

Detroit said in the accompanying disclosure statement, that it would likely continue to amend and update the debt plan ahead of an hearing currently scheduled for April 14.

"The city continues to make progress with its creditors and retirees and hopes to reach agreement in the near term on a number of outstanding issues," emergency manager Kevyn Orr said in a statement. "We believe that the plan we have proposed, and continued to refine, is feasible and allows the city to reduce its staggering $18 billion in debt and live within its means."

Like the first plan, the new proposal relies heavily on an unfinished agreement that would bring as much as $816 million of new money, backed by the art collection at the Detroit Institute of Arts, toward the city's pension liability.

The new plan offers pensioners carrots and sticks to encourage them to accept the DIA plan.

If they don't agree to the DIA plan, police and fire pensioners would see their proposed recovery rates fall to 86% from 90% — with all future cost-of-living-adjustments eliminated, which the city calculates as an additional 18% cut in the value of the pensions.

If they agree to the plan, they would only see 6% cuts.

General employees would see cuts of 34% — plus the elimination of COLAs, estimated to reduce their pensions' value by 13% — if they don't agree, and 26% if they do agree.

A spokesman for the police and firefighter pension fund told local reporters the amended plan was "dead on arrival" and noted that the cuts were actually more around 30% once the COLA cuts are included.

In addition to the smaller recovery rates, the updated plan includes a clearer picture of the proposed treatment of its pensioners and retirees and health care claims, including highlighting the COLA changes.

It also includes the city's one and only settlement, an $85 million deal with its interest-rate swap counterparties that the bankruptcy court still needs to approve. That deal was not yet finalized when the last plan was released.

The revised document also includes updated information on the city's push to privatize its water and sewer department, including responses to a request for interest sent out to private firms a few weeks ago.

The city in mid-March issued a request for information from private firms after months of talks with three adjacent suburbs to create a new regional authority stalled. The city said in its debt plan that it was in contact with 41 parties about the RFI. Of those, 16 parties have said they intend to submit proposals, according to the city. The city will review the responses by April 7 and craft a shortlist by June 1.

If the city enters into a public-private partnership, then investors who hold $5.9 billion of water and sewer bonds may get cash in exchange for their bonds. If the city cannot privatize the asset, the Detroit Water and Sewer Department may refinance the debt itself, which would require the bondholders to waive their call protection. The city would, in the case of a refinancing, reserve the right to restructure debt service payments so they fall under a possible future lease payment. In all cases, the water and sewer bondholders would receive 100% of their principal.

The city's proposal to invest $1.5 billion in services and capital upgrades over 10 years remains the same in its new plan of adjustment.

As was the case with the first plan, any recovery for the holders of the city's $1.4 billion of pension certificates of participation remains unknown. Detroit filed a lawsuit in January to invalidate the COPs. The city may still reach an agreement with the COPs holders, however, which recoveries that could be as high as 40%, according to the plan.

The plan includes a new class of impaired creditors based on the city's retiree health care benefits. The first plan lumped the other-post employment benefits liability in with the pension liability, and the new plan separates them. With claims around $5.7 billion, OPEB recoveries are estimated at around 15%.

The plan is the only way for the city to stabilize itself, Detroit said in the filing. The city wants to secure a $300 million financing when the court confirms the plan.

"The plan provides for the resolution of a variety of complex financial and operational issues faced by the city," the filing says. "The city believes that adjustment of the city's debts pursuant to the plan will provide the greatest recovery for creditors of the city, while simultaneously allowing for meaningful and necessary investment in the city. The plan contemplates the city's emergence from Chapter 9 this year and represents a crucial step toward the city's rehabilitation and recovery from a decades-long downward spiral."

Creditors are pushing U.S. Bankruptcy Judge Steven Rhodes, who oversees the case, to push back hearings on the plan by two weeks to give more time for review.

Syncora Guarantee Inc., joined by the city's two pension funds and its largest union, and others, asked the judge to push back a deadline to object until April 14. Currently, Rhodes has set a Thursday deadline for creditor objections to the plan with an April 14 hearing on the final plan.

Detroit on Monday protested the request, accusing Syncora of a "scorched earth policy" when it comes to challenging the city.

The current bankruptcy schedule sets an April 28 deadline for parties other than individual bondholders or individual retirees to file objections to the final plan. June 30 is the deadline for individual bondholders and retirees to object. July 7 is the deadline for any creditor that filed an objection to file a supplemental objection.

Rhodes said last week he is interested in appointing a municipal finance expert to independently review the plan for its feasibility. Detroit signaled its support of Rhodes' plan on Monday in a filing that suggested he appoint a panel of experts, headed by Harvard economist Edward Glaeser, to review the plan.

A trial on the plan is currently scheduled to begin July 16.

Copies of the plan and disclosure statement, along with additional information and links related to the Chapter 9 case, can be found at . Bankruptcy court filings are available at

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.