CHICAGO - Detroit reached a settlement with the last major holdout creditor in its bankruptcy case that features a mix of cash and prime downtown Detroit land.
Bond insurer Financial Guaranty Insurance Co. and Detroit reached the deal after weeks of negotiations. It could effectively end opposition to Detroit's bankruptcy exit plan -- and the threat of future appeals -- though U.S. Bankruptcy Judge Steven Rhodes still needs to approve the settlement and rule on the feasibility of the city's plan of confirmation.
Closing arguments on the confirmation plan are expected to begin next week.
"FGIC is very happy to be in this situation," FGIC attorney Alfredo Perez told Rhodes in court Thursday morning after the parties outlined the terms of the settlement. "I anticipate going forward it will be a mutually beneficial agreement."
The deal features roughly $150 million of cash for FGIC's $1.1 billion claim, as well as various development credits and the chance to own and develop a high-profile site along the Detroit River now occupied by the Joe Louis Arena. FGIC will have the option to build a 300-room hotel, condominiums, and retail on the site adjacent to the city's convention center. The deal also gives FGIC the arena's parking garage.
FGIC wraps $1.1 billion of Detroit's $1.5 billion of certificates of participation, which the city in January sued to repudiate, claiming the debt was illegally issued. Detroit has agreed to drop the lawsuit as part of the settlement.
It's unclear whether the holders of the COPs, which include seven hedge funds, are on board with the deal. Thomas Mayer, who represents the holders, reportedly told Rhodes it was still uncertain how many would choose to opt in on the settlement.
The Detroit Red Wings, who now play at Joe Louis, are set to leave the arena in 2017 for bond-financed arena elsewhere in Detroit.
The deal echoes a recent settlement Detroit reached with bond insurer Syncora Guarantee Inc., which also featured a mix of cash, land, and long-term leases on a downtown parking garage and a tunnel to Canada.
Settlements that feature real estate development options for creditors are rare in Chapter 9, said municipal bankruptcy expert and attorney James Spiotto.
"This is unique; usually it's some kind of refinancing," Spiotto said. "But occasionally in workouts and restructurings, you come up with unique ways of unlocking value where others might not have found it."
The "devil is in the details" of the settlement, he added.
"The hope is that they've brought in economic partners to help develop downtown and expand and improve the city," said Spiotto. "But as ecstatic as people are that they are close to having a plan confirmed, as the judge said in the beginning it's the long-term survival and reinvestment in Detroit that's the most important thing."
Detroit's attorneys told Rhodes in court Thursday that the deal would help spark development along a key stretch of downtown Detroit riverfront.
"This will be hopefully another turning moment for this area of Detroit," Jones Day attorney Corinne Ball said, according to local reports from the court. "The city and the state do hope there would be a lot of development around it and a great benefit to the city."
Members of the administrations of Gov. Rick Snyder and Detroit Mayor Mike Duggan helped negotiate the deal, along with the court's chief mediator, U.S. District Chief Judge Gerald Rosen, and others.
FGIC agreed to withdraw all its objections and support the confirmation plan, while the city will drop its lawsuit seeking repudiation of the COPs, and FGIC will drop its counterclaims against the city tied to the lawsuit.
FGIC, like Syncora, is allowed to retain its claim against the counterparties on the interest-rates swaps that hedge the COPs. The city has previously settled with the counterparties, UBS AG and Merrill Lynch, and the battle between the insurers and the banks over the swaps may now continue, but without the city as a party.
Detroit would give FGIC $6.11 million and the Downtown Development Authority would transfer its right to another $33.6 million of claims in a separate class to FGIC to help satisfy the insurer's claims related to the swaps insurance, according to the term sheet.
FGIC and the COP holders would get $74.2 million from so-called New B Notes issue to help settle the COPs claims. The insurer and holders would get another $67.2 million in New C Notes under the deal. The C notes, which are unsecured, carry a 5% interest rate and a 2026 maturity, and are payable from parking revenues.
FGIC would get another $19.7 million in settlement credits, which the insurer can be apply to a Request for Proposals for city parcels or assets. The credits can be used to offset up to 50% of the purchase price of parking or other eligible assets.
The heart of the agreement is the development of the Joe Louis Arena site. The deal calls for the city to grant a yet-to-be-formed development entity, controlled at least initially by FGIC or the COP holders, the option to acquire and develop the nearly nine-acre site and the parking garage.
Relying on $6 million in state aid, Detroit has agreed to demolish the arena within 90 days after the Red Wings vacate, in 2017, and clear the land by September 2018.
Within 36 months, the developer needs to have hired a partner, prepared a plan and submitted it to the city for approval. If the city approves the plan, the state has agreed to reimburse FGIC up to $18 million in TIF and other incentives for the development. The state may also designate the land as a neighborhood empowerment zone, which would mean additional tax breaks.
The developer will have to begin the work within a year of the closing date and substantially complete it within 36 months or the parcels revert to the city.
"We are pleased to be able to announce this settlement with the city, which provides FGIC a recovery consistent with other Class 9 creditors," Timothy Travers, Chief Executive Officer of FGIC, said in a statement. "FGIC has always been, and continues to be, believers in Detroit's long-term revival prospects, and this deal gives us the opportunity to participate in and help catalyze that revival. We look forward to managing our ongoing stake in the city and helping to drive value for Detroit and for FGIC's stakeholders."
Detroit emergency manager Kevyn Orr said he would ask the Detroit City Council to approve the deal next week. If the council rejects the plan, Orr can petition the state emergency loan board for its approval instead.
The city plans to turn in an amended confirmation plan - its eighth— reflecting the new agreement by Monday.