Saturday, November 08, 2014
Detroit Bankruptcy Update Fall 2014
The Detroit Institute of Arts (DIA) has cleared its biggest remaining hurdle to secure its art collection. Last week, the city of Detroit reached a settlement with its largest holdout creditor, the Financial Guaranty Insurance Company (FGIC). As Detroit’s 16-month-long bankruptcy trial comes to a close this week, the 11th-hour deal all but guarantees that the DIA’s collection will not be sold to pay down the city’s debt.
The bond insurer FGIC—which is owed around $1bn of Detroit’s $18bn debt—was one of the most vocal opponents to the so-called “Grand Bargain”, a scheme to safeguard the DIA’s collection while generating money for the city’s pensioners. Under the terms of its recent settlement, the city has agreed to demolish the Joe Louis Arena, home to Detroit’s hockey team, and allow FGIC to develop a hotel, offices and retail stores in its place. In exchange, the company will withdraw its objections to Detroit’s plan to emerge from bankruptcy. Last month, the city reached a similar settlement with the Syncora Guarantee Insurance Company, another major creditor.
The bankruptcy judge Steven Rhodes is due to render a final verdict on the city’s plan—including the Grand Bargain, which is considered its centrepiece—during the first week of November. But some bankruptcy experts already consider it a done deal. “The city was always going to propose a plan that did not involve selling the art,” says Laura Bartell, a law professor at Wayne State University in Detroit. “That’s what they did, and the judge is going to confirm the plan.”
Many expected the fate of the DIA’s collection to remain in limbo well after Judge Rhodes’ ruling, however, because creditors unhappy with his decision were likely to appeal. (FGIC and Syncora previously claimed that a sale of the art collection could garner as much as $8.1bn.) The recent settlements take the possibility of an appeal off the table. The creditors “like what they are getting—they won’t want to appeal”, Bartell says.
If both the city council and Judge Rhodes approve Detroit’s proposed plan—which they are expected to do—the DIA will be spun off as an independent non-profit. The state of Michigan has teamed up with local and national organisations to pledge $816m over 20 years to the cause. The money would essentially fund a “buy-back” of the collection from the city of Detroit while providing pensions to retirees from the city’s police and fire departments. (Donors to the so-called Grand Bargain include the Los Angeles-based J. Paul Getty Trust, General Motors and the DIA itself, which pledged $100m.) http://www.theartnewspaper.com/articles/Eleventhhour-settlement-all-but-secures-Detroits-art/36039
Search artnewspaper.com the following related articles.
• Detroit's Big Three car makers pledge $26m to protect city’s art
• Detroit’s creditors demand a full reckoning of museum’s art
• Detroit Institute of Arts pledges to raise $100m for city pensions
• Michigan should save Detroit’s collection
• The immorality of using Detroit’s art to bail out bankrupt city
2. DETROIT - (Reuters) - A U.S. judge on Friday confirmed Detroit's plan to adjust $18 billion of debt and exit the biggest-ever municipal bankruptcy.
The ruling by U.S. Bankruptcy Court Judge Steven Rhodes, who is overseeing the historic case, came more than two months after the start of a hearing to determine whether the 1,165-page plan was fair to creditors and feasible for the city to implement.
Speaking from the bench, Rhodes said the city acted in good faith when it proposed its plan to shed about $7 billion of debt and invest $1.7 billion over the next several years to improve services and attract residents and business.
Detroit's odyssey through Chapter 9 municipal bankruptcy began on July 18, 2013, with major creditors girding for battle and has wound down in a flurry of settlements. A so-called Grand Bargain taps into $816 million from foundations, the Detroit Institute of Arts and the state of Michigan to ease pension cuts and protect city-owned art work from sale.
Two companies that guaranteed payments on Detroit bonds, Syncora Guarantee Inc [SYCRFS.UL] and Financial Guaranty Insurance Co [FGIC.UL], received options to develop parcels of land.
Rhodes said the city's ability to mitigate cuts to retiree pensions "borders on the miraculous."
Attending Rhodes' ruling were Detroit's state-appointed emergency manager, Kevyn Orr, who took Michigan's biggest city to bankruptcy court, and Mayor Mike Duggan, who is now tasked with carrying out the plan. more..
3. DETROIT - Less than 16 months after Detroit became the largest city in the United States to file for bankruptcy, a federal judge on Friday approved a plan intended to help it escape years of financial ruin and begin the hard work of becoming viable again.
Judge Steven W. Rhodes of the United States Bankruptcy Court for the Eastern District of Michigan found that the city’s plan to shed $7 billion in debt and to invest about $1.7 billion into long-neglected services was fair, feasible and in the best interest of Detroit’s creditors. The decision came with remarkable speed and with far less discord than many had foreseen given the size of the city and the complexity and depth of its financial woes.
Many bankruptcy experts had predicted that the closely watched litigation would take months or even years longer, as it has in smaller cities and counties. Vallejo, Calif., spent nearly three years in bankruptcy. Stockton, Calif., just got permission to emerge after 27 months. And Jefferson County, Ala., which spent a little more than two years in bankruptcy, now faces more litigation a year after its case was supposed to have
After many months of private mediation sessions, Detroit’s exit plan was more a deal than a court-imposed solution, largely agreed to by the major groups involved, including the city’s retired workers and financial creditors. That significantly quieted the court fight and limited the possibility of years of appeals.
The ruling marks an end to one chapter for Detroit, which, when the case began, had accumulated roughly $18 billion of debt and was wrestling with annual budget deficits, miserable city services and a nonstop exodus of residents and investment dollars. The exit plan sets aside $1.7 billion over a decade to remove blighted buildings, to purchase new fire trucks and ambulances, and to upgrade the city’s antiquated computer systems.
“Getting this resolved is a huge issue in terms of creating a great environment for the city, and not just the city but for the state, to all rally on focusing on growing Detroit,” Gov. Rick Snyder of Michigan, who approved the city’s bankruptcy filing on July 18, 2013, said in an interview. “It really takes care of the city government issue and gets a normal context to be a more traditional government structure again.”
The plan requires strict oversight of the city’s finances in the years ahead by a commission that includes representatives of the state.
Detroit’s price tag for lawyers, experts and other costs of the bankruptcy proceedings was $150 million. But the city’s departure from bankruptcy does not mean an end to its vast challenges. While the court plan permits the city to free up additional money to make desperately needed improvements, it does not ensure that the city will not fall into financial distress once more, or that it will attract businesses that create jobs, or that it can lure enough new residents to end a decades-long population decline.
“We are starting this journey, not ending it,” said James E. Spiotto, a bankruptcy lawyer and expert on municipal bankruptcy. “Bankruptcy is just debt adjustment, but that’s not a solution,” he said. “What you really need is the recovery plan. We can’t lose sight of that. We won’t know for five, ten, 15 years whether Detroit has solved its systematic problem.”
To help him evaluate the city’s prospects, Judge Rhodes hired his own fiscal-policy expert to decide whether the plan of adjustment was feasible, part of what is required for an exit plan to be approved. The expert, Martha E. M. Kopacz, of Phoenix Management Services, said her research showed that the plan was feasible and that city officials were enthusiastic about making it work. But there were considerable risks, she said, and the speed of the bankruptcy proceedings had left Detroit with little margin for error.
To get one group of creditors to accept a settlement, Detroit’s negotiators sometimes had to reduce what was available to satisfy others. To make pension cuts acceptable to retirees, for example, the city based its exit strategy on an assumption that pension investments would earn average annual returns of 6.75 percent, something Ms. Kopacz said was too aggressive for a fragile city that could not afford investment losses.
“I would make it 5 percent if I ruled the world,” she said at one point during the bankruptcy trial, under questioning by Judge Rhodes.
The assumed rate of return gave the retirees something to hope for — the possibility that even better results from the pension investments than the 6.75 percent assumed by the city would show that cuts were not needed after all and that a new deal could be negotiated with the cuts reversed. But if the pension investments do not produce the returns needed, the city will have to make up the missing money.
Over all, Detroit’s creditors settled on a wide range of losses, but none as far-reaching as the city had proposed in February as it began planning how to leave bankruptcy.
Some financial creditors, like the bond insurer Syncora Guarantee, will get about 14 cents on the dollar for their debts, a low recovery rate but not as low as the city had initially proposed. Syncora and Financial Guaranty Insurance Company had insured a type of debt that was never very secure to begin with, and the city contended that low recoveries were appropriate given the level of risk.
Late in the deal-making phase of the bankruptcy, Syncora and Financial Guaranty both had their recoveries sweetened with possible gains on real-estate and infrastructure projects that Detroit promised to help them pursue on prime locations in the city. Bondholders who bought higher-quality bonds have been promised far better recovery rates.
Retired general municipal workers agreed to 4.5 percent cuts to their monthly pension checks, an end to cost-of-living increases, higher health care costs and a mandatory forfeiture of previous payments from the pension system that were deemed improper. Retired police officers and fire fighters have accepted smaller reductions.
The city was able to grant all of its retirees a better deal than first expected because of a so-called “grand bargain,” in which foundations, the state and the Detroit Institute of Arts pledged millions of dollars to bolster the city pension system and give the art collection new, bankruptcy-proof ownership... more
4. DETROIT-—The cost of Detroit's historic bankruptcy has reached $126 million and counting, surpassing the bills the big auto makers faced when they were in similar straits.
An internal report on fees to outside advisers shows costs have roughly grown by four times since December when the city reported the total bill at nearly $28 million. The city's leading law firm on the case already has charged $47 million.
City officials describe the nation's largest municipal bankruptcy case as entering its final phase with the hope of exiting by year's end. The trial phase of the bankruptcy is under way and expected to stretch into October.
Detroit's municipal bankruptcy case has been both complex with more than 100,000 creditors and fast-paced with a goal of exiting bankruptcy as soon as possible so the city can again be run by locally elected officials.
The cost is surpassing such corporate bankruptcy filings as General Motors Co. GM +0.70% , which came in around $110 million, and Chrysler at around $77 million. Still, Detroit is unlikely to set any records. Bankruptcy fees for the U.S. administration of Lehman Brothers Holdings Inc., for example, surpassed $2.2 billion.
The price tag for Detroit is significantly higher than the total amount reviewed so far by fee examiner Robert Fishman, who was appointed by the court to oversee costs. Court filings show he has largely signed off on more than $50 million in fees through March. Occasionally, Mr. Fishman has called out some professional fees as unreasonable, questioning the need for media relations services whose work includes monitoring newspaper articles about the case.
The city of 688,000 residents already has paid nearly $104.5 million of its $126 million bill for lawyers, accountants, financial advisers and experts on everything from police work and pension funds to art appraisals and public relations, according to a Sept. 5 spreadsheet reviewed by The Wall Street Journal.
On Friday, the chief mediator in the case began a new round of nonstop talks between lawyers for holdout creditors and lawyers for the city. Because of that, Judge Steven Rhodes has put on hold the trial over the city's plan to cut about $7 billion of Detroit's estimated $18 billion in long-term obligations to allow for additional time to negotiate.
The city remains cash poor but not broke. With its bankruptcy filing, Detroit stopped paying certain debts, including payments to its pension funds, freeing up cash to pay its lawyers and consultants. The city had a cash balance of $156.8 million for the quarter that ended June 30.
City officials contend the fee charges aren't out of line. "Obviously the longer we're here, the more cost," said Bill Nowling, spokesman for Detroit Emergency Manager Kevyn Orr, who has been running the city since March 2013.
Mr. Nowling added the fees need to be put into context: the city's debt-cutting plan written by consultants envisions eliminating $7 billion in city debt and reinvesting $1.4 billion into blight removal and city services.
Stephen J. Lubben, an expert in corporate governance and business ethics at Seton Hall University School of Law in Newark, N.J., said the fees struck him as consistent with many corporate bankruptcy cases, but "here obviously it's money that otherwise could go to Detroit creditors or even the residents of Detroit, who arguably could have better use for $126 million."
Mr. Nowling said the total fees may rise to roughly $150 million by the time the city exits bankruptcy protection. Mayor Mike Duggan declined through a spokesman to comment about the bankruptcy fees, citing Mr. Orr's role in running the case on the city's behalf.
5. DETROIT - Elizabeth Blair asked for a little help with her NPR story on Detroit’s wildly varying appraisals of the city’s art:
Marion Maneker, who publishes the Art Market Monitor says the price often depends on the tastes and mood of a collector on any given day.
MARION MANEKER: Nobody can peer into the depths of a billionaire’s soul and know just how valuable a work of art is to that person.
BLAIR: Christie’s was commissioned to appraise only about 5 percent of the museum’s total collection of some 66,000 objects. Some of Detroit’s creditors said that was unfair and that the whole collection should be valued. So the city and the museum brought in another appraiser to do that – Artvest valued it between $2.8-$4.6 billion.
[…]Financial Guarantee Insurance Company, FGIC, has proposed the art be used as collateral for a loan to pay off creditors. Marion Maneker says to understand why the two appraisals are so different, you need to look at who’s paying for them. The smaller value was commissioned by the city and the museum and the bigger one was paid for by the creditor.
MANEKER: What we have here are legitimate appraisals for different clients with different points of view on how the sale would take place.
BLAIR: Maneker is quick to add, if a sale takes place at all. A so-called grand bargain would raise more than $800 million for city retirees, who are also creditors, under the condition the art not be sold. Art appraisers for both sides are expected to testify during Detroit’s bankruptcy trial.