CHICAGO — Holders of Detroit's $5.3 billion of revenue bonds, and of its $1.4 billion of its pension certificates, filed vociferous objections to the city's plan of debt adjustment late Monday, laying out the arguments they will present at a bankruptcy trial two months away.
The challenges were among a total of 15 that came ahead of Monday's deadline for filing objections to the plan of confirmation, the key document that Detroit has crafted to resolve the largest municipal bankruptcy in the U.S.
Bankruptcy Judge Steven Rhodes will hold a trial on the plan beginning July 24.
Other challenges came from Oakland and Macomb Counties, tied to failed negotiations over creating a new regional authority to take over the Detroit Water and Sewerage Department.
The U.S. Department of Housing and Urban Development objected to the plan over disputed claims of $22 million on loan guarantee contracts.
Bond insurers Syncora Guarantee Inc. and Financial Guaranty Insurance Co. are also fighting the city's exit plan.
Despite the challenges, Detroit has reached settlements with several major creditors, including most of its retirees' representatives, its pension funds, and the three bond insurers who wrap its unlimited-tax general obligation bonds.
But it plans to cram down its pension certificate of participation holders, which include several European banks, as well as its limited-tax GO holders.
It has proposed repaying its $5.9 billion of water and sewer debt in full, but impairing the bonds with a refinancing plan that strips out key structural protections and liens.
The
They call the retirees a "politically favored interest group," and argue that the plan is being rushed through to meet a Sept. 30 bankruptcy exit deadline that is politically motivated. Detroit emergency manager Kevyn Orr's term is up in October, and the city and state have said they want to resolve the case before then.
"A plan that simply throws enormous sums of money at certain symptoms of the city's decline without addressing the root causes of that decline ... is not in the interests of creditors or the city's current and future citizens," the COP banks argue. "More time under the protection of this court and hard work by the emergency manager and his team (or a new team of financial advisors with experience in municipal finance and prior successes in municipal restructuring) would allow the city to fully develop and propose real solutions to the root causes of the city's decline, which, in turn would permit the city to propose a plan that benefits both creditors and the city's citizens."
Like the water and sewer holders, the COP holders claim the city has inflated the size of its pension debt, which Orr estimates at $3.5 billion, and that the pension recoveries are therefore likely to be even higher than the plan proposes.
The banks that hold the pension certificates say the plan also discriminates unfairly by including a pot of money, dubbed the grand bargain, which will come from a group of private foundations, the Detroit Institute of Art, and the state, which will go solely to the pensioners.
They also take issue with the city's $1.4 billion, 10-year capital improvement plan, saying that it may lead to revenue increases that no non-labor creditors would share in.
Like Syncora and FGIC, the COP holders argue that the city is seriously underestimating the value of its art collection, and that an accurate valuation could bring millions more into the case.
Several challenges arose over the city's proposed treatment of revenue bonds tied to the Detroit Water and Sewerage Department and failed efforts to create an authority to take over the system.
Members of an Ad Hoc Committee of the
Like Oakland County and the COP holders, the water and sewer holders say that the city's proposal to take $428.5 million out of the system to fund the general employees is unfair and detrimental to the system's fiscal health.
Detroit wants to refinance the outstanding water and sewer debt, which is currently junk rated, as part of its recovery plan. The city assumes it will win higher ratings with a new debt issuance, which will generate key savings.
The refinancing relies on an assumption of "absurdly low interest rates," the bondholders argue.
"[I]t appears that the city has merely taken a single-A rated bond yield curve and has applied that to the DWSD bonds," they say. A more accurate interest rate may in fact be higher than the current rate in light of the proposed impairment, the brief says.
The city also plans to strip the call protections out of existing bonds in order to refinance quickly after exiting bankruptcy. "As the ad hoc committee expects to show at the confirmation hearing, call protection is a critical component of risk management and returns for municipal debt, particularly for investors like mutual funds," the brief says.
The committee is made up of BlackRock Financial Management Inc., Eaton Vance Management, Fidelity Management & Research Company Franklin Advisers Inc., and Nuveen Asset Management. They hold about $1.33 billion of the total $5.27 billion of DWSD bonds.
U.S. Bank NA, which is the trustee for the DWSD bonds, also objected to Detroit's plan, and is joined in its objection by the ad hoc committee.
Oakland County
Oakland County officials have repeatedly accused the city of failing to turn over adequate financial information, among other complaints. The parties remain in court-ordered mediation to try to hammer out a deal.
"Nothing can be more vital to a thriving commercial 21st Century metropolis than the providing of clean, safe water and sewerage service," Oakland County wrote in the brief. "Yet, notwithstanding this essential need, the city appears willing to engage in a game of chance, jeopardizing the DWSD, and thus the region, by putting the DWSD's operations at risk."
