Slow talks could hasten Detroit bankruptcy filing

AP News
Posted: Jul 17, 2013 5:15 PM
Slow talks could hasten Detroit bankruptcy filing

DETROIT (AP) — After several weeks of slow-moving talks, only one deal has been reached between the state-appointed emergency manager hired to fix Detroit's finances and the more than 50 creditors, two public pension funds and unions jockeying for a piece of the billions of dollars the city owes them.

The slow process is frustrating some creditors who complain the city isn't doing much to bargain with them beyond offering 10 cents on a dollar. They say bankruptcy attorney Kevyn Orr's message to them has been a blunt — take it or leave it.

Though Orr has said he's attempting to avoid the largest municipal bankruptcy in U.S. history, experts say the stalemates at the bargaining tables could push the city in that direction.

"I think Orr is going to get to the point where he has enough ammunition to justify a Chapter 9 if there are enough people not willing to get on the bus," said James McTevia, a turnaround expert based north of Detroit in Bingham Farms. Bankruptcy may be the only option for a city that for years has crashed toward insolvency, he said.

Orr, who oversaw Chrysler LLC's bankruptcy and restructuring, briefed the city's debt holders on June 14 on his plan to erase the city's $17 billion in debt, warning that time was short and the chance of filing for bankruptcy was about 50-50. He vowed to reassess things from the meeting in 30 days. Since then, he and his team held several meetings with debt holders but few details of those talks have come from Orr's office.

Bankruptcy comes with risks, experts say. Fees for things like parking and traffic tickets could increase as Orr looks for ways to raise money to pay creditors. Trash collection, grass cutting, snow plowing and other already limited essential services could be scaled back even more. More city workers could lose their jobs. And Detroit's already poor image will take more hits.

"As bad as things get, sometimes they can get worse," said Anthony Sabino, business law professor at St. John's University's Peter J. Tobin College of Business. "The additional layers of putting the fate of the city in the hands of a bankruptcy judge, the layers of legal expenses — there would be such a shattering of confidence it could be the point of no return for the city."

Detroit is paying millions of dollars in legal bills and for consultants involved in Orr's restructuring. Sabino said that would easily double in bankruptcy and legal costs for creditors would soar. Residents and Detroit business owners, like Quicken Loans founder Dan Gilbert could become disenchanted.

"The city of Detroit has had decades of financial problems, and it is time to face those problems and move forward," said Matt Cullen, the president and chief executive for Rock Ventures, which is the umbrella entity for Gilbert's portfolio. "Just as the auto companies had to reinvent how they do business, so does the city of Detroit."

Several creditors didn't return phone messages or declined to talk with The Associated Press about the negotiations. One creditor, Peter Hayes, managing director and head of BlackRock's Municipal Bonds Group, criticized Orr's plan and said the emergency manager is breaking promises the city previously made on bond payments.

"Those who own Detroit (general obligation) bonds, either on their own or in pooled vehicles such as those we manage at BlackRock, will suffer the financial consequences of the emergency manager's misguided plan," Hayes wrote in a letter published this week in the Detroit Free Press.

It's not clear if the settlement reached in principle late last week with Bank of America-Merrill Lynch will be enough to prod other creditors. Orr spokesman Bill Nowling wouldn't reveal details because the deal had not been signed. Bank of America-Merrill Lynch spokesman Bill Halldin declined to comment.

"The clock's still ticking. We're getting to the point where we need to see movement from our creditors," Nowling said.

McTevia said one game plan could be to cut a deal with some of the larger players out of court and use those as leverage with other creditors.

"Or at the worst, file a Chapter 9 plan with some creditor support that can be used as a cram down on others," he said.

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Of the 53 creditors negotiating with Orr's restructuring team, 48 are unsecured, meaning the money they're owed is not backed by city revenue streams like water service fees or casino taxes.

New York-based Syncora Guarantee Inc., a trustee on city swap deals involving casino tax revenue, has butted heads with Orr by trying to limit the city's access to some of the money after creditors are paid. Syncora also accused Orr of having no intention to negotiate in good faith. A county judge issued a temporary restraining order to keep $11 million per month being held up by Syncora flowing back into city coffers after Orr took the issue to court.

Another creditor, National Public Finance Guarantee Corp., the indirect subsidiary of MBIA Inc., which has about $100.7 million of insured exposure to Detroit's general obligation debt and $2.4 billion of the city's revenue secured debt, is continuing to meet with the city but is also "considering potential alternatives to the plan the city has provided," said spokesman Kevin Brown.

A Chapter 9 filing should be seen as a last resort, said Michael Sweet, a bankruptcy attorney with the Los Angeles-based Fox Rothschild law firm.

"It certainly will be a heavy lift to make it happen, but the movement of a major creditor or two could dramatically change the landscape in a way that would indicate a bankruptcy filing may not have to be the outcome," he said.

But union and pension officials complain they've been offered little new data on Detroit's cash-flow problems.

"I don't think they really want to sit down and talk about the real issues in Detroit," said Ed McNeil, a spokesman for the American Federation of State, County & Municipal Employees Council 25. "I think (bankruptcy) may be his ultimate goal, but even if he goes that way he has some hurdles to cross. You've got to be able to show you're insolvent anyway."