CHICAGO — Try asking nicely.

That's the newest strategy for bankrupt Detroit in its contentious relationship with the holders of its $5.2 billion in water and sewer revenue bonds.

Detroit is asking the bondholders to tender their debt to help the city embark on a massive refinancing of the water and sewer department debt portfolio.

The tender offer is presented as an alternative to the city's current proposals that ask the water and sewer bondholders to either waive their call protection — allowing for a refinancing — or take a lower coupon rate.

The bondholders have thus far shown little enthusiasm for such an impairment and have not settled with the city, with its bankruptcy confirmation hearing looming in two weeks.

Officials from Detroit Water and Sewerage Department said the success of the refinancing depends on how many bondholders agree to tender their debt. The 10-day offer will run sometime between from Aug. 7 to Aug. 21. The finance team said the refinancing would achieve savings by reducing interest rates and debt-service costs.

The city plans to ask the bankruptcy court for an expedited hearing to lift the automatic stay and approve the issuance. Such a bankruptcy order could lift credit ratings out of the current junk territory, according to the finance team's presentation to the Detroit Board of Water Commissioners, which approved the financing Wednesday.

Bondholders would have the option of keeping their bonds, or tendering them at a fixed tender offer price that was not made public. The tender would be financed either by a bridge loan from Citi, a public offering of exit tender bonds through the Michigan Finance Authority, or a combination of both, the city said.

There does not appear to be a clear-cut settlement with bondholders attached to the proposal. At a bankruptcy hearing Wednesday, Detroit's Jones Day attorney, Heather Lennox, told Bankruptcy Judge Steven Rhodes that a fresh settlement with a major creditor could be announced in the next few days. It was not clear on Thursday whether that deal is with the water and sewer bondholders, counties considering a new regional authority, both or neither.

The department also plans to refund some of its currently callable debt for savings and issue $175 million of new-money sewer bonds for capital projects.

Citi will be the lead underwriter on all the deals.

Bondholders who agree to tender their bonds would have to agree to drop all objections to the city's plan of debt adjustment, and to allow their debt to be described as "unimpaired" under the plan. Bondholders who want to participate have until Aug. 21 to advise the city in writing. That's the start date of the trial on the city's confirmation plan.

Upon closing of the financing, the city would update its confirmation plan to reflect the "unimpaired" status of the revenue bonds.

It's unclear how the city plans to achieve lower interest rates with the refinancing outside of plans to attach the bankruptcy order to the new bonds. The finance team is meeting with ratings agencies Thursday, according to its presentation. They plan to ask for investment-grade ratings on the debt, which is now junk rated. The bankruptcy court order, if it comes, could bring the ratings into investment-grade territory, the finance team told the board.

"Concurrent with the removal of threatened impairment, DWSD will request that the investment-grade ratings be restored to all existing DWSD bonds upon conclusion and closing of the tender offer financing and the amendment of the plan of adjustment to remove the DWSD bond-related impairment provisions," the presentation said.

But there's a "distinct possibility" that ratings analysts will consider the tender option deal a distressed exchange and push the rating down to D, the team warned. "The DWSD financing team will stress to the rating agencies that the tender offer is voluntary and not distressed and that all bondholders receiving the offer to tender their bonds will have the voluntary option to either receive the offered tender price for their tendered bonds, or to retain ownership of their bonds with their original terms."

The Michigan Finance Authority, which would act as conduit on at least part of the refinancing, is expected to meet Monday to vote on the deals.

"This transaction has the potential to significantly lower the interest rate on existing DWSD bonds, reduce DWSD's debt service costs, reduce risks and transaction costs, and enhance the department's future cost of borrowing," the department said in a press release. "The savings to DWSD customers could be in the millions." The optional tender is a "voluntary market-based alternative" to the city's impairment proposals, the release said. It came out of talks between the city, the state, bankers at Citi and advisors at First Southwest Company.

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