In Bankruptcy Case, Detroit Turns an Opponent into an Ally
By Alisa Priddle, Matt Helms, Nathan Bomey and Brent Snavely
The City of Detroit and creditor Syncora have reached an agreement, in principle, that would end the bond insurer's vigorous opposition to the city's restructuring and turn the company into an ally, reflecting a remarkable breakthrough in the city's historic bankruptcy case.
The proposed deal -- which came on the same day that Detroit and its suburbs struck a deal for a regional water authority -- would leave bond insurer Financial Guaranty Insurance Co. (FGIC) and several hedge funds as the last remaining major creditors preventing an amicable resolution of the largest municipal bankruptcy in U.S. history.
Crucially, the deal is contingent on Syncora and the city convincing UBS and Bank of America to release the insurer from certain interest-rate liabilities that are connected to the $1.4-billion pension debt deal Syncora and FGIC insured.
"There is a tentative agreement between Syncora and the City that we believe is an acceptable resolution for all concerned," Syncora said in a statement. "We have asked that the trial be delayed for 48 hours so that we can work through certain contingencies contained in the deal, including obtaining full resolution with Bank of America, UBS and other stakeholders. We are hopeful the deal will be finalized in the next 48 hours."
While the breakthrough could delay the trial until Friday, it could ultimately shorten hearings currently scheduled to go into October.
"I think this is the happiest Kevyn Orr has been in some time," said John Pottow, a professor at the University of Michigan Law School. "This is a big happy night."
Syncora would get a total of about 26 cents on the dollar when all elements of the deal are included -- up from no more than 10 cents under the city's current proposal, two people familiar with the deal said. Syncora is owed hundreds of millions of dollars.
Bankruptcy Judge Steven Rhodes must still approve the deal.
Pottow said he is surprised at how generous the terms of the agreement are, and predicts that Rhodes will take a close look at the agreement and will likely ask his financial expert to review it.
"It sounds like a lot of money to me," Pottow said. "If I am a feasibility expert, I will want to know how they found all of this extra money."
A person familiar with the negotiations who spoke on condition of anonymity said terms of the deal would include giving Syncora control of a city parking garage near Grand Circus for 30 years. The deal also includes a 20-year lease extension of operation of the U.S. part of the Detroit-Windsor Tunnel. The insurer currently controls the U.S. side of the tunnel through a contract that expires in 2020.
Syncora owns the company, American Roads, that operates the tunnel on the city's behalf. Windsor owns and operates the Canadian side of the tunnel. Proceeds from the lease are around $4 million to $5 million a year. The new lease would go through 2040.
Syncora also would receive $23.5 million in cash through so-called B-notes, bonds Detroit had already floated in the bankruptcy, the person said.
Despite the tentative deal, Bank of America and UBS stand in the way.
Syncora won't agree to settle with Detroit unless the banks release the insurer from its responsibility to cover the banks' losses on an $85-million deal brokered in the spring to eliminate a costly swaps deal reached by Kwame Kilpatrick's administration to secure a steady interest rate on a $1.4-billion debt.
The banks were owed nearly $290 million on the swaps but agreed to take significantly less after Rhodes said the swaps were probably illegal.
If the banks don't agree to end their legal fight against Syncora, Detroit may still face the insurer in court.
"Once again, the swap banks are standing in the way," one person familiar with the deal said.
The news comes on the same day the city struck a tentative 40-year deal with Macomb, Oakland and Wayne counties to create a regional water authority that will provide $50 million annually to finance badly needed upgrades and help low-income residents avoid water shutoffs. The two deals represent major breakthroughs toward resolving the city's $18-billion bankruptcy, the largest in U.S. history.
The city has already reached deals with unions and pensioners, leaving FGIC and the hedge funds as the last big creditor holdout in Detroit's bankruptcy. There are hundreds of small and objectors and creditors.
Syncora would get a long-term lease on the city's parking garage beneath Grand Circus Park, which could raise significant funds for the bond insurer, but it also must invest $13 million in upgrades. After it invests for repairs, Syncora would keep the proceeds from running the garage but would eventually give Detroit 25% of the profits. Syncora would also get parking bonds worth $21 million.
Syncora also would get $6.2 million in credits toward purchasing city property and buildings that might go up for sale in the coming years, including Joe Louis Arena. Syncora could use the credits to offset the sale price.
The settlements reflect a significant achievement for the largest municipal bankruptcy that was filed on July 18, 2013. Many thought it would take years to settle.
But several days into the city's historic bankruptcy trial -- after which Rhodes will have the power to approve the plan of adjustment -- resolving the dispute with Syncora would be a major breakthrough.
The company has been the city's most vociferous opponent, decrying Orr's plan to favor retirees over financial creditors and transfer the Detroit Institute of Arts to an independent trust in exchange for outside funding to reduce pension cuts.
In August, Syncora drew Rhodes' ire by accusing bankruptcy mediators Gerald Rosen and Eugene Driker of "naked favoritism" on behalf of pensioners. The judge is considering sanctions on Syncora's attorneys. But a deal could help smooth over the differences.
John Roach, spokesman for Mayor Mike Duggan, said the mayor is declining to comment on the bankruptcy process, which is Orr's responsibility. Orr's office also refused to comment Tuesday.
Syncora and FGIC insured a $1.4-billion pension obligation certificates of participation deal brokered by Kilpatrick's administration in 2005 to eliminate the city's unfunded pension liabilities.
Doug Bernstein, a bankruptcy attorney and partner with Plunkett Cooney who represents the outside foundations that helped fund the grand bargain to save the DIA and reduce pension cuts said Rhodes will still want to closely evaluate the bankruptcy plan and decide if it will solve the city's financial issues after the city emerges from bankruptcy.
"The city still has to get past that feasibility hurdle," Bernstein said. "The biggest remaining hurdle is feasibility."
FGIC, as the last remaining major creditor objecting to the plan, will have a tougher time arguing against the plan on its own, Bernstein said.
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