Detroit agreed to pay some bondholders about 74 percent of the $388 million they are owed in a deal that shifts $100 million to city pension funds and lightens the burden on insurers that backed the debt.
The agreement announced today by court-appointed mediators helps resolve a key conflict over the treatment of one group of general obligation bonds in the city’s record $18 billion bankruptcy. As recently as last month, Detroit’s emergency financial manager, Kevyn Orr, had proposed cutting some bond recoveries to as little as 15 cents on the dollar.
Retired city workers would also see greater recoveries if U.S. Bankruptcy Judge Steven Rhodes approves the deal. The remaining 26 percent of the bond payments will be assigned to support pension plans “to insure that the most vulnerable retirees remain above the federal poverty line,” mediators appointed by Rhodes said in a statement.
Detroit filed for bankruptcy in July, saying it couldn’t meet its financial obligations and still provide necessary services. The city has since been in negotiations over cuts with municipal unions, retired workers and bond insurers.
Under a plan submitted to the court in February and revised last month, pensions for police and firefighters would be cut about 6 percent if they vote for the plan, 14 percent if they don’t. Pensions for other city workers would be cut by about 26 percent if they vote yes and by about one-third if they don’t.
About 20 percent of current pensioners would be pushed below the poverty line by the plan, according to a committee of retirees that has been negotiating with the city.
That plan also included a proposal by the state of Michigan and philanthropic foundations to inject more than $800 million into public worker pension funds in exchange for a promise that art owned by the city wouldn’t be sold.
Bond insurer stocks climbed on today’s announcement, which covers insured unlimited-tax general obligation bonds. The insurers are seeking to regain market share in the $3.7 trillion municipal market after the financial crisis stripped them of their top credit grades. Units of Assured Guaranty Ltd. (AGO) and MBIA Inc. had their ratings raised by Standard & Poor’s last month.
Assured rose 3 percent to $24.80 at noon in New York trading, while MBIA jumped 2.2 percent to $13.27.
Under the deal, negotiated between the city and three bond insurers, policies “will remain outstanding to ensure payment in full of the debt service as originally scheduled,” according to the mediators’ statement.
“Investors that own Detroit UTGO Bonds insured by Assured Guaranty can be certain they will continue to receive timely payment of scheduled principal of, and interest on, their bonds in full,” the Hamilton, Bermuda-based company said in an e-mailed statement.
Kevin Brown, a spokesman for Armonk, New York-based MBIA (MBI)’s National Public Finance Guarantee Corp., said the company will make sure all bondholders it backed who hold the unlimited-tax bonds will be paid in full.
“They are going to get every nickel that they were originally entitled to,” he said in an interview.
Today’s agreement calls for the outstanding general obligations to be exchanged for new securities issued by the Michigan Finance Authority that are secured by the unlimited-tax general obligation pledge of Detroit and a fourth lien on distributable state aid payments.
That would entitle bondholders to the same protection as those investors holding outstanding Detroit securities backed by state aid, though the previously issued debt had a second lien on payments. Those bonds were deemed secured and carry a Standard & Poor’s rating of AA, third-highest.
Yields on outstanding Detroit unlimited-tax general obligations dropped today, according to data compiled by Bloomberg.
Tax-exempt debt maturing in April 2023 backed by Ambac Assurance Corp. changed hands at a yield of 7.84 percent, the lowest in 10 months. Similar unlimited-tax securities due in April 2022 and insured by Syncora Guarantee Inc. traded with an 8.55 percent yield, the lowest since May and down from as high as 13.7 percent last month.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).