CHICAGO - As Detroit works to nail down a settlement with bond insurer Syncora Guarantee Inc., muni market experts said important questions remain in the bankruptcy case.
Detroit and Syncora, which had been the most aggressive creditor throughout the almost 14-month-long bankruptcy, reached a tentative deal Tuesday that gives the insurer a mix of cash, real estate, asset leases and bonds in exchange for its willingness to support the plan of confirmation.
If finalized, the deal would mark a major breakthrough for the largest municipal bankruptcy in the U.S. and likely hasten the trial on the city's plan of confirmation.
"The intended result is not just a partnership for plan confirmation, but a partnership for the future of Detroit," Syncora's Kirkland and Ellis attorney Ryan Bennett told U.S. Bankruptcy Judge Steven Rhodes Wednesday during a hearing on delaying the trial.
Syncora holds just under $400 million of controversial pension certificates of participation issued in 2005. The city is trying to repudiate the debt in a separate lawsuit.
Financial Guaranty Insurance Co. insures the remaining $1 billion of the COPs, and is now poised to become the sole standing holdout creditor if it doesn't reach its own deal over the weekend.
Rhodes suspended the trial until Monday to give the parties time to talk and finalize the accord. The parties will meet in court-ordered mediation Thursday.
For Syncora to sign off on the deal, UBS AG and Merrill Lynch Capital Services Inc., which are the counterparties on interest-rate swaps that Syncora wraps, need to give up their claims and release Syncora from any responsibility of payment.
At the same time, the limited-tax general obligation bondholders and retirees need to sign off on the settlement, which would ultimately mean lower recoveries for them.
The LTGO holders reached a deal with the city for a 34% recovery, with the provision that they would receive additional money if the city successfully repudiates the COPs. Retirees would also get a piece of the so-called disputed COPs fund. The LTGO holders and retirees would both have to agree to drop their claims in the disputed fund.
"Everybody needs to know if this is a real deal or not, otherwise it's back to trial," said a source familiar with the case.
The city would not likely have approved the deal if it did not think it would be able to craft fresh agreements with the LTGO holders and retirees, the source added.
"It's interesting how one piece of the puzzle if it unravels or can't be executed, has this domino effect," Howard Cure, director of municipal research at Evercore Wealth Management, said. "It's almost tenuous unless you can get everybody to agree to do it."
The settlement deal would give Syncora, which owns Detroit-based American Roads, a firm that operates the city's half of the Detroit-Windsor Tunnel, an extension of the tunnel lease until 2040. The lease currently expires in 2020. Syncora would also be given a 30-year lease of a downtown parking garage in return for investing $13 million in capital improvements, and several vacant downtown Detroit lots around the tunnel.
"This is very unique to Syncora, because they had access to certain properties, that helped facilitate this deal," said Cure. If the settlement is inked, all eyes will turn toward FGIC and the hedge funds that hold the COPs. At the Wednesday court hearing, FGIC attorney Alfredo Perez, with Weil, Gotshal & Mange, asked Rhodes for a delay to allow his team to digest the deal.
"We read it twice and are still having a hard time understanding it," Perez told the judge, according to local reports from the courtroom.
In a statement, FGIC confirmed it has not agreed to the settlement terms, but that it remains open to an agreement. "The latest deal reinforces our view that the city has abundant sources of incremental value available for distribution to Class 9 claimants - however the issue at hand is their willingness to distribute this value fairly and equitably - not the presence of the value itself," the insurer said.
A Syncora settlement would be important to the city's ability to end its bankruptcy, but it's not a key market event, market participants said.
"This settlement doesn't have any outsized impact on the market," Alan Schankel, managing director, muni research and strategy at Janney Montgomery Scott.
"I think a lot of the negative fallout we've already seen," he said.
"I think this is positive in the context of the bankruptcy," Schankel said. "They've settled with all the other creditors and this is kind of another step along the way, and the quicker and more smoothly it goes the better for the market in general terms."
The city's settlements with its general obligation bondholders, who settled for 74%, and its water and sewer holders, who were part of a complicated tender program and refinancing, mean more in the long run than the Syncora deal, said Matt Fabian, managing director at Municipal Market Advisors.
"The city has been unwilling to deal in traditional ways with capital markets creditors and capital markets creditors have been unwilling to fully defend their securities," Fabian said. "Detroit has weakened municipal securities because it has shown that issuers going forward may be more likely to fight capital markets creditors rather than work with them."
If the Syncora settlement is finalized, it removes one of the final obstacles to the city's effort to complete its massive bankruptcy just over a year after it began. Emergency manager Kevyn Orr's tenure is up Sept. 29 and Gov. Rick Snyder faces re-election in November.
"This is one of the last things," Fabian said of the Syncora deal. "There aren't many hurdles left for the judge and the team to get this done before the election so the governor can run on a nearly complete Detroit bankruptcy."
