Detroit Reaches Deal With Bondholders in Bankruptcy Talks

Detroit got closer to resolving its record $18 billion municipal bankruptcy, reaching a deal with the insurer of taxpayer-backed bonds on how to treat debt holders.

Details are being put into final written form, according to a statement filed in court yesterday by mediators appointed to help broker an agreement. Since filing for bankruptcy last year, Michigan’s largest city has been negotiating with many of its biggest creditors, including unions, pension plans and some bondholders.

The mediators didn’t say how much the bondholders covered by yesterday’s agreement, who are owed about $163.5 million, would recover or how much insurers would have to pay to cover any losses on the limited tax, general obligation bonds known as LTGOs. The city had previously estimated that without a deal, bondholders would get back as little as 10 cents on the dollar.

“The settlement recognizes the unique status and niche of the LTGOs in the municipal finance market,” the mediators said.

Municipal bond investors have been watching Detroit’s bankruptcy because the city has argued that its general obligation bonds aren’t secured by any collateral. That contradicted long-held assumptions among investors that such bonds had priority over other obligations, such as some government services and employee benefits.

‘Enormous Negative’

“It’s an enormous negative for general obligation bondholders to receive anything below par,” Matt Fabian, managing director of Municipal Market Advisors, a Concord, Massachusetts, research firm, said yesterday in a phone interview. “It implies more risk for general obligation secured bondholders in Michigan.”

Bill Nowling, a spokesman for the city’s emergency manager, Kevyn Orr, didn’t respond to an e-mail seeking comment on the agreement.

U.S. District Judge Gerald Rosen, who is chief of the federal court in Detroit, is overseeing a group of mediators who are trying to help the city and its creditors negotiate an end to the bankruptcy.

The remaining objectors include some bond insurance companies that are on the hook for investor losses and suburban communities that are city water and sewage system customers.

In a separate announcement yesterday, the biggest union for the city’s general employees said it had a tentative new contract. The union also urged its members to vote in favor of the bankruptcy plan.

A trial on the fairness of the city’s debt-adjustment plan is scheduled to begin in August. The judge overseeing the case will take the votes of creditors, including any cast by about 30,000 current and retired city workers, into consideration when deciding whether to approve the plan.

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

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