CHICAGO — Detroit's major creditors filed a flood of vigorous objections to the city's bankruptcy plan of debt adjustment Monday ahead of a key April hearing.
Most creditors complained the city's 600-page disclosure statement lacked critical information needed to answer even basic questions, such as recovery rates. Detroit's stalled proposal to privatize its water and sewer department — and refinance $5.7 billion of debt in the process — came under fire by many creditors. In addition to bond insurers, bondholders, unions, and retirees, the counties of Macomb and Oakland also challenged the plan, marking their first appearance in the case.
U.S. Bankruptcy Judge Steven Rhodes, who is overseeing the case, set an April 7 deadline for objections to the so-called disclosure statement, the narrative that accompanies the plan of debt adjustment. A hearing is set for April 17. If approved, the city will send the plan to creditors for their votes.
The hearing is one in a series on the key confirmation plan, and part of Rhodes' and the city's effort to resolve the country's largest municipal bankruptcy by the fall.
The city's failure to include critical information united most creditors' objections.
The "shortcomings prevent the disclosure statement from answering the two specific questions that are most important to creditors in determining how to vote: 'how much am I going to get paid and when?'" said National Public Finance Guarantee Corp. in its objection. "The disclosure statement fails to provide key financial information that is essential to evaluating the proposed payments under the plan, whether such payments are in the best interests of creditors, the efficacy of the city's proposed reinvestment initiatives, and whether the plan, as it currently exits, represents the best path forward for the city and its creditors."
Ambac Assurance Corp., Assured Guaranty Municipal Corp., Berkshire Hathaway, and Syncora Guarantee Inc., also objected on the grounds of insufficient information.
Ambac complained that it's impossible for general obligation bondholders, especially those that hold limited-tax GO bonds, to determine the true size of their recovery, which the city puts at 15%, Ambac said. "The terms and provisions of the proffered distribution are so vague as to make it impossible for any holder of Limited GO bonds to evaluate the validity of the city's estimate," the insurer said.
Like other creditors, Berkshire, which acts a secondary insurer on a chunk of the city's water and sewer bonds, added that Detroit fails to make clear important aspects of the voting and confirmation process.
In particular, Berkshire said the city failed to include "a description of the position of certain bond insurers that such insurers reserve the right to deny coverage under the applicable insurance policies should any bondholder vote in favor of the plan as currently proposed," said Berkshire attorney My Chi To of Debevoise & Plimpton LLP. The city should update the statement with the impact of its proposals in "clear, plain English," Berkshire wrote, especially for retail investors who are unfamiliar with complex legal documents.
Detroit's failure to provide details of its proposal to privatize the Detroit Water and Sewerage Department also sparked major complaints.
Emergency manager Kevyn Orr has pushed for months to create a regional authority with its adjacent three counties to take over the massive system and carve out an annual revenue stream, estimated at $47 million, which would go to the city's general fund. With Macomb and Oakland Counties balking at the terms, the city in recent weeks began talking with private parties to take over the system. The plan for the DWSD is key to the city's post-bankruptcy plan, and a completed deal would impact the recovery of various creditors.
"The essential problem with the disclosure statement for DWS bondholders is this: the city is not at a point in its negotiations with the counties — not to mention potential third-party buyers — to allow it to craft a disclosure statement that allows bondholders to understand what they are being asked to accept for their claims," the attorneys representing an ad hoc bondholder committee wrote in their objection. The attorneys represent Nuveen Asset Management, BlackRock Asset Management Inc., Fidelity Management & Research Company, and Franklin Advisors Inc., all holders of the debt.
"The city is still at the stage of trying to keep all of its options open .... and therefore cannot provide basic information about the treatment of the DWS bonds that is necessary for DWS bondholders to cast their votes."
A privatization of the water and sewer system would require refinancing the outstanding bonds. The new terms are expected to include reduced interest rates, waived call protections, lack of insurance, new collateral and a revised position of debt service in the waterfall of payments.
The water and sewer bondholders want Rhodes to delay approval of the statement until the city decides who will be running and managing the system and the terms of any new bonds that the holders may be receiving under the privatization. "Until that time, it appears impossible for DWS bondholders to receive adequate information that will enable them to reach informed judgments about what they are being asked to accept for their claims."
In addition to the general lack of details, Ambac complained of a lack of details about the so-called grand bargain — an $820 million plan that features using a mix of private and public funds to protect the art collection in the Detroit Institute of Arts from sale.
Ambac also said Detroit needs to provide more information about its planned exit financing, a $300 million deal tentatively set with Barclays that would pay off a $120 million loan with Barclays that will close in the next few weeks.
Oakland and Macomb Counties protested the lack of information about the water and sewer system, which they participate in. Oakland also said the city's proposed treatment of various creditors with different recoveries violated bankruptcy code. The city, for example, has proposed paying police and fire pensioners up to 94 cents on the dollar while other creditors, such as general obligation bondholders and perhaps the county itself, only 15 cents on the dollar. "This gross disparity in treatment clearly amounts to unfair discrimination and renders the plan unconfirmable on its face," Oakland said.
The city's largest union, the American Federation of State, County and Municipal Employees, filed one of the most robust challenges, warning that the plan would lead to more poverty and crime and a "decaying social atmosphere" that comes with the proposed pension cuts.