CHICAGO -- Creditors opposed to Detroit’s bankruptcy petition face a midnight deadline Monday to file their objections to the plan, while firms fighting the only financial settlement the city agreed to before filing for Chapter 9 bankruptcy gear up for a Wednesday hearing.
Judge Steven Rhodes, who is overseeing the historic case, set today’s deadline for creditors to file their formal objections ahead of a trial on Detroit’s eligibility for Chapter 9 bankruptcy that is set for Oct. 23.
The city’s two retirement systems said last week they plan to object on the grounds that Gov. Rick Snyder’s authorization of the filing is illegal, because it would impair pensions that are protected under the state constitution.
To gain Rhodes’ permission to officially enter bankruptcy, Detroit needs to prove it is insolvent and that it has negotiated in good faith with its creditors, or that it has too many creditors to make negotiations possible.
The pension funds are set to meet Monday with emergency manager Kevyn Orr’s team to discuss a dispute over the size of the unfunded pension liability. The pension funds estimate the liability at around $650 million and Orr puts the figure at $3.5 billion.
On Wednesday at 10 a.m. Rhodes will hold a hearing on the city’s only creditor settlement, which would terminate a series of interest-rate swaps hedging a chunk of pension obligation certificates.
The settlement has Detroit paying the counterparties, UBS AG and Merrill Lynch, 75% of the cost of terminating the swaps, estimated at just under $300 million. The agreement would give the city access to roughly $11 million a month in casino revenue that is used as collateral on the swaps.
Creditors opposed to the settlement include bond insurers Syncora Guarantee Inc., Ambac Assurance Corp., Assured Guaranty Municipal Corp., Financial Guaranty Insurance Company, and National Public Finance Guarantee Corp. The firms filed their objections to the settlement last week.
Ambac, in its objection, called the validity of the swaps lien on casino revenue “highly dubious” and said it is in violation of state law, which does not allow casino revenue to be used as collateral on a financial obligation.
Ambac also argues that, contrary to the city’s assertions, the lien on casino revenue does not qualify as special revenues that are exempt from the bankruptcy case.
“An objective evaluation of the necessary factors simply cannot support a compromise so heavily weighted in the swap counterparties’ favor,” Ambac said. The city is “overpaying one set of creditors at the expense of other similarly situated creditors,” the insurer argued.
Assured called the proposed settlement “unreasonably favorable to the swap counterparties.”
Detroit filed a list of 46 exhibits it plans to present in defense of the settlement. It also said it might call as witnesses Orr; Ken Buckfire, CEO of Miller Buckfire & Co. LLC, the city’s financial advisor; and Gaurav Malhotra, principal of Ernst & Young LLC., financial restructuring advisor to the city.
Also last week, Rhodes appointed Gerald Rosen, chief district judge of the U.S. District Court for the Eastern District of Michigan, to act as mediator in the case.
Rosen will lead negotiations between the city and its debtors.