Detroit Updates Bankruptcy Plan Saying Water Agency Possible

Detroit, the biggest U.S. city to file for bankruptcy, updated its debt-cutting plan with details about its offer to exchange more than $5 billion in water and sewer bonds for new debt and said a deal on a new water agency may emerge from mediation talks with its suburbs.

The city will agree to form an agency to take over its water and sewage department only if the surrounding suburban counties of Macomb, Oakland and Wayne agree to drop opposition to the debt-cutting plan. The counties object to the plan, claiming it might raise their residents’ water or sewage rates.

Bondholders have through today to decide whether to exchange their debt. After that, the city will decide whether to move forward with the settlement and close the financing.

Under the refinancing plan, the city will raise $5.5 billion, about $190 million of which will be used to improve its sewage-disposal system. The rest will be used to replace the old bonds on similar terms.

The new bonds are designed to help the city save money. Under the proposed debt-cutting plan, the city would take about $50 million a year from the water and sewage department to help shore up an underfunded pension plan. The city argues that the department hasn’t paid enough into the plan in the past.

The city should be in the early days of a six-week long trial over the feasibility of its entire bankruptcy plan when it decides whether to go forward with the exchange offer.

Investor Objections

Should the deal succeed, investors and bond insurers would drop their objections related to the water and sewer portion of Detroit’s debt-cutting plan, according to court records. That would shorten the bankruptcy trial and may make it easier for the city to win approval from U.S. Bankruptcy Judge Steven Rhodes.

The city filed a record $18 billion municipal bankruptcy last year, saying decades of decline and the disappearance of manufacturing jobs left it unable to meet financial obligations while still providing basic services to its 700,000 residents.

Led by emergency financial manager Kevyn Orr, Detroit has proposed cutting some retirement benefits and reducing payments to some bondholders, in addition to tapping the water and sewage department for cash.

Dozens of witnesses are expected to testify at the trial, which is scheduled to end Oct. 17.

The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

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