Detroit Plans to Pay 34 Cents on Limited-Tax General Obligations

Bankrupt Detroit plans to pay investors who own its $164 million of limited-tax general-obligation bonds 34 cents on the dollar, according to an internal report.

The reduction is part of the city’s plan to pay about $2.5 billion toward $9.9 billion in unsecured obligations, including debt and pensions. The report from financial adviser Kenneth Buckfire was sent by Bill Nowling, a spokesman for Emergency Manager Kevyn Orr.

“Mr. Buckfire’s affidavit speaks for itself,” Nowling said in an e-mail. “His analysis correctly explains the financial situation facing Detroit and how the City’s Plan of Adjustment is not only fair, but is absolutely essential.”

Investors in the $3.7 trillion municipal market are watching Detroit’s bankruptcy case for clues about how debt backed by a government’s pledge to pay will fare in cases of distress. Detroit filed its record $18 billion municipal bankruptcy about a year ago.

The 34-cent recovery differentiates limited-tax bonds from their unlimited-tax counterparts, which are considered to have a stronger revenue pledge. Detroit in April agreed to pay unlimited-tax general obligation bondholders about 74 percent of the $388 million they are owed.

The federal mediator in Detroit’s legal negotiations said June 13 that the city reached a deal with bondholders without saying how much they would recover.

Included in the report is a plan to borrow $300 million to help the city exit bankruptcy and to use for services.

Detroit “will be able to obtain exit financing and continued access to the capital markets in the near term on reasonable terms,” according to the report.

Buckfire also wrote that creditors would fare better under the plan of adjustment than if the bankruptcy case were dismissed.

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