A bankruptcy scorecard for Detroit

April 17, 2014

Settlements in the Detroit bankruptcy case are arriving quickly. I thought that it might be useful to have a scorecard to tally the pieces. I took the chart above from the Detroit’s June 13, 2013 Proposal to Creditors (page 98). It lists the unsecured creditor claims. So far, Detroit has settled four unsecured liabilities valued at $4.107 billion for $1.213 billion, or 30 percent.

Here are four announced settlements with numerous caveats.

UTGO settlement: Detroit originally argued that the unlimited tax general obligation bonds (UTGO) were unsecured. This interpretation flew in the face of established muniland legal precedents and was watched closely by market participants. In its settlement with the bond insurers who wrapped these bonds, the city reversed its stand and agreed to acknowledge that the debt was secured by a specific lien on property tax revenues. Bond insurers will be paid 74 cents on the dollar and bondholders will be made whole by the insurers. The property tax lien will continue to be collected by the city and 26 cents on the dollar will go to a fund to help the lowest income retirees. It will cost the city $287 million to resolve $369 million in liability with the bond insurers.

Pension unfunded liabilities: Detroit originally estimated that its two pension systems were underfunded by $3.4 billion. Morningstar and others argued that the city had over-inflated the pension liability. They were right. Retirees will not face big cuts. The city has reached agreements with pension leaders. Detroit expects contributions from the state, private foundations and the Detroit Institute of Art to further fund the pension systems in exchange for preservation of the city’s art collection. The Detroit News has the pension settlement details:

Detroit reached tentative deals with two pension funds late Tuesday that would lead to modest reductions in monthly pension checks, free up cash to revitalize city services and speed the end of the biggest municipal bankruptcy in U.S. history.

The city’s general employees would take a 4.5 percent cut to pensions and lose an annual 2.25 percent cost-of-living adjustment under the proposed deal, multiple sources told The Detroit News.

Police officers and firefighters would see no pension cut and receive a 1 percent annual cost-of-living adjustment, as agreed upon earlier Tuesday by a retiree association.

Swaps settlement: After bankruptcy judge Steven Rhodes rejected several proposed settlements, the city was finally able to get approval for a $84 million settlement with Bank of America Merrill Lynch and UBS to resolve its swaps. The two banks will recover 31 percent of the remaining mark-to-market value of their swaps. The swaps were issued to hedge interest rate changes on the variable rate pension obligation certificates (POC) that remain unsettled.

Several large pieces of the Detroit bankruptcy remain unresolved, including the treatment and cost of the city’s largest liability — $5.7 billion of future retiree health care benefits (previously costing Detroit $140 million per year). Dollar figures for resolving this expense have not been released. Detroit also has approximately $6 billion of secured debt, owed to bondholders for the Detroit Water and Sewer System, which is unlikely to be impaired since it is secured and protected within the bankruptcy code.

Detroit Radio WDET’s Craig Fahle program

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