CHICAGO -- Two bond insurers that wrap Detroit water and sewer bonds have told bondholders to reject Detroit's bankruptcy plan of confirmation, even as the insurers fight for the exclusive right to vote on the plan.
Assured Guaranty and National Public Finance Guarantee Corp. last week sent notices to holders of roughly $5.3 billion of Detroit water and sewer revenue bonds, recommending they vote against the plan of confirmation.
The bondholders are one of the few remaining holdout creditors opposed to Detroit's plan of debt adjustment. Holders of $1.4 billion of certificates of participation, as well as bond insurers Syncora Guarantee Inc. and Financial Guaranty Insurance Co., also oppose the plan.
Bondholders, along with retirees, pensioners and other Detroit creditors, have until July 11 to vote on the city's plan of confirmation, the major document that outlines its debt adjustment and its bankruptcy exit plan.
The recommendation to bondholders comes after both Assured and National filed formal court objections to the city's proposed treatment of the Detroit Water and Sewerage Department bonds.
Emergency manager Kevyn Orr wants to repay in full the principal on the bonds, but strip out call protections in order to allow a restructuring of the bonds. He also wants to lower interest rates on the new debt and push the priority of debt service below other payments.
Assured and National recommended that bondholders reject that plan. But they also said bondholders should vote for an alternative proposal, including in the confirmation plan, that would allow investors to receive new DWSD bonds that would bear the same interest rate but without call protection.
"This bond election should be made as a protective measure against the possibility that your class of beneficial holders of DWSD bonds accepts the plan and the plan is confirmed by the bankruptcy court," Assured's note said.
If investors do not vote for that alternative, and the plan is ultimately confirmed, the bondholders may receive new DWSD bonds that have a lower interest rate as well as limited call protection, the note said.
Like Assured, National said it believes the city's plan as it stands is illegal.
"National has objected to confirmation of the plan because the plan proposes to impair and modify the contractual terms of several series of DWSD bonds," the note said. "National believes the proposed impairment and modification of DWSD bonds violates bankruptcy law and established Michigan law."
The notices also note that the insurers are arguing in court that they have the exclusive right to vote on the plan in place of the bondholders.
But Assured noted Bankruptcy Judge Steven Rhodes, who is overseeing the case, is unlikely to make a decision on the issue before the July 11 deadline has passed.