CHICAGO - In a major development in Detroit's bankruptcy, mediators announced a settlement on the treatment of the city's limited tax general obligation bonds that "recognizes" their unique status in the municipal market.
No details were released on the recovery rate.
Details of the settlement are in the "final documentation process," according to a statement released Friday. "The settlement recognizes the unique status and niche of LTGOs in the municipal finance market. The insurer of the LTGOs has made clear it will honor its insurance commitments on the existing policies."
The settlement was negotiated between the city and the two principal LTGO creditors that either hold or insure a large majority of the bonds, and will be laid out in an amended plan of adjustment, the statement said. The pact was reached after intensive negotiating sessions spanning more than six months.
The settlement came quickly after U.S. Bankruptcy Judge Steven Rhodes on Thursday ordered Detroit back into mediation with its limited-tax general obligation bondholders to try to reach a settlement after months of failed talks.
The order sent the city to the table with Blackrock Financial Management and Ambac Assurance Corp.
"With this settlement, only a few remaining, albeit significant, disputes remain to be addressed between the city and its creditors prior to the bankruptcy's court scheduled hearing on the city's plan of adjustment," the statement said. "The mediators pledge to re-double their efforts to resolve those remaining issues and reach meaningful agreements between the city and remaining creditors."
Other holdout creditors include holders of $1.4 billion of pension certificates of participation and bond insurers Syncora Guarantee Inc. and Financial Guaranty Insurance Co.
The latest mediation order marked at least the fourth court-ordered mediation session on the LTGOs. The LTGO creditors were among a few remaining major financial creditors not to reach a settlement with the bankrupt city. The three insurers who wrap the city's unlimited-tax GO bonds reached a settlement that calls for a 74% recovery.
Ambac in May filed a challenge to the city's plan of debt adjustment, which was joined by Blackrock. The city has proposed repaying the LTGO holders roughly 10 to 13 cents on the dollar. It's among the lowest recovery rates offered to any creditor in the city's debt plan.
If the parties had not reached a settlement and the battle went to trial, it would have marked the first time that a court hearing a Chapter 9 bankruptcy case had considered or ruled on the status of limited-tax general obligation bonds.
Ambac insures about $93 million of the $163 million of Detroit LTGOs that are not secured by a lien on state aid. Despite the small size of the debt relative to the Detroit bankruptcy case, the stakes are considered high for the insurer because the final treatment, determined either in a settlement or a ruling, could serve as an influential example for future recoveries.
In a recent order, Rhodes outlined 14 legal issues he wanted lawyers in the case to prepare arguments on for discussion at future hearings, including whether the "failure of the plan to treat LTGO claims as senior unsecured claims violates the bankruptcy code, Michigan law, or a contract right that is enforceable in bankruptcy."
Rhodes recently pushed back the start of a trial on the city's confirmation plan to Aug. 14 It is scheduled to last 28 days.
In a separate development Friday, the bankruptcy court announced he city and AFSCME Council 25 completed a series of tentative agreements that will provide most city employees represented by the union with the protections of a comprehensive collective bargaining agreement.
Implementation of the agreements is contingent on ratification by union members and state approval.
"These agreements build on the master template agreement negotiated by AFSCME and the city-wide coalition of unions that include most non-uniformed employee bargaining units. That Coalition Template agreement was achieved in April," the statement read.
In separate voting on the city's bankruptcy plan of adjustment, AFSCME leaders are urging all active and retired city employees to vote "yes" on the plan. "We remain severely concerned with the way this bankruptcy has been handled from its inception. However, the agreements we have achieved are, in our view, the best path forward for city employees and retirees. They simply cannot risk the further serious reductions in pension, pay and job security if the Plan, and our collective bargaining agreements, are not approved," said AFSCME Council 25 President Al Garrett.
Terms of the collective bargaining agreements will be presented to active employees who will have an opportunity to ratify the agreements. Public disclosure of the contract terms will occur after the agreements are ratified by June 30.
