By Karen Pierog and Lisa Lambert
DETROIT (Reuters) - With key players in Detroit's historic bankruptcy case locked in marathon mediation sessions, the pressure is on bond insurer Financial Guaranty Insurance Co., the last major holdout creditor, to settle with the city.
Judicial mediator Gerald Rosen has ordered the city and some of its major creditors including FGIC to keep talking until they come to an agreement. Another deadline looms outside of the court process: Kevyn Orr, the city's emergency manager, is expected to end his term on Sept. 29.
Detroit's surprise settlement earlier this week with the other major bond insurer, Syncora Guarantee Inc., in addition to prior deals with pension funds, unions, retirees and some bondholders could mean FGIC may have missed its opportunity to recoup a significant portion of the $1.1 billion it has on the line from insuring Detroit debt.
Syncora, which pegs its claim at about $400 million, worked out a three-part deal involving city-owned land and contracts. As part of the agreement, Syncora's lease of the Detroit part of a tunnel connecting to Canadian town Windsor would be extended, the company would reap most of a public parking garage's revenue, and a Syncora subsidiary could gain ownership of six downtown lots to develop. There is no valuation of the insurer's recovery from those assets.
The U.S. Bankruptcy Court's confirmation trial on Detroit's debt adjustment plan that began Sept. 2 ground to a halt on Wednesday in the wake of the Syncora settlement in principle. Without its own deal, FGIC faces fighting the city's debt adjustment plan on its own.
"It will be very hard for (FGIC) to remain on the outside looking in," said Michael Sweet, a bankruptcy attorney at Fox Rothschild in San Francisco. "Whatever pressure they were feeling before this settlement was reached will certainly become greater. (Syncora's settlement) reduces the risk that the plan would not be confirmed even if FGIC doesn't settle."
None of the parties called into mediation, including the city, FGIC and Syncora, are permitted to comment on the process.
Bill Nowling, Orr's spokesman, said the window for FGIC to complete any deal involving city assets is "quickly shutting" given Orr's imminent departure.
"That doesn't mean it can't happen," Nowling said. "If it does, FGIC would have to get it through (the city) council in less time." Orr is expected to continue advising the city after his official duties expire, and could still influence how the city proceeds with restructuring.
FGIC's ability to grab other assets may also be limited by deadlines established by Michigan's 2012 emergency manager law.
Orr, operating under that law, on Tuesday put the Syncora deal before Detroit's city council for a vote that must take place within 10 days. If the council rejects the deal, it has seven more days to propose an equal alternative. Then a state board that includes the Michigan treasurer would choose between the two options.
FGIC has eyed city assets, particularly art work at the Detroit Institute of Arts. But the collection is considered off limits because it is at the heart of the "Grand Bargain," which taps into money from the state of Michigan, philanthropic foundations and the art museum to ease pension cuts and protect the art from being sold to pay creditors.
A FGIC deal would have to condense the deadlines facing the Syncora deal and win city council approval before Orr cedes control of the city, Nowling said.
After Orr leaves, the city has 10 days to reach a consent agreement with Michigan's state treasurer and that pact could influence subsequent settlements. Nowling said Orr is working with Mayor Mike Duggan and the council to craft a document spelling out the transfer of Orr's powers.
Without settlements, claims by FGIC and Syncora would be paid at 10 cents on the dollar or not at all under the latest version of Detroit's plan to shed about $7 billion of its $18 billion of debt and other obligations.
Orr, a former bankruptcy attorney at law firm Jones Day, was tapped almost 18 months ago by Michigan's governor to fix the sinking finances of the state's biggest city. Detroit had suffered years of population and employment declines, as well as corrupt financial management. Orr led the city into the biggest-ever Chapter 9 municipal bankruptcy filing in July 2013.
QUESTIONS ON BANKS, FEASIBILITY REMAIN
There are other loose pieces in Detroit's bankruptcy puzzle, including two investment banks that reached an $85 million settlement months ago over interest-rate swaps.
Syncora insured some of city's $1.4 billion of pension debt and related swaps and must quickly resolve claims and counterclaims with the swap providers UBS AG and Bank of America unit Merrill Lynch Capital Services before it can cement its deal. A source familiar with the matter said the Syncora deal was made with no consultation with the banks and offered them nothing. Syncora's exposure to the banks runs at least in the tens of millions of dollars.
Detroit is also awaiting approval on a deal with three Michigan counties reached this week over city's water and sewerage department, which serves the southeast Michigan region.
Then there are objections by individual creditors representing themselves which U.S. Bankruptcy Judge Steven Rhodes, who will ultimately determine whether Detroit's plan is fair and feasible, must hear.
If FGIC settles, questions on fairness would fade.
"Feasibility stays the same," said Melissa Jacoby, a law professor at the University of North Carolina at Chapel Hill, who's been following the case. "But the pressure is on (Rhodes) more to the extent that there have been more settlements."
Nowling said regardless of a possible FGIC settlement, the city would continue bringing its witnesses to dissect the plan for Rhodes once the trial resumes next week.
"We still have our responsibility to defend the plan and prove that it's viable," Nowling said.
(Reporting by Karen Pierog and Lisa Lambert, additional reporting by Megan Davies in New York; Writing by Karen Pierog, editing by David Greising and John Pickering)