Detroit $18 billion adjustment plan in effect; set to emerge Dec. 11

By Kali Hays

New York, Dec. 10 – The City of Detroit’s Chapter 9 plan of adjustment is in effect as of Wednesday and the city’s official emergence will occur at midnight on Thursday, according to an attorney familiar with the case.

As previously reported, judge Steven Rhodes confirmed the city’s plan Nov. 7, along with all negotiated settlements with creditors and has denied several motions to stay the order pending appeals made by creditors.

Among the settlements is the city’s “grand bargain,” an $865 million settlement between Detroit’s major creditors that protects current and retired employee pension programs and city-owned art.

The pensions will be funded from a lease of the Detroit Water & Sewer Authority (DWSA), contributions from the art settlement totaling about $465 million and funds from the State of Michigan totaling $350 million.

Police and fire retirees will receive 90% and 95% of their earned pensions after the elimination of cost-of-living allowances while general retirees will receive in excess of 70% of their pensions after the elimination of cost-of-living allowances.

Current employees will continue to earn pensions payable in the future under traditional defined benefit formulas rather than defined contribution arrangements, according to the plan.

As previously reported, Detroit said the two pension funds will operate under more conservative investment return assumptions, resulting in pension contribution predictability and stability. The city said these are critical elements because it must be assured that it will have sufficient funds for operations and its $1.5 billion investment program in the future.

Plan details

The confirmed plan provides for the adjustment of up to $18 billion in secured and unsecured debt while implementing a 10-year plan to invest in Detroit and improve essential services and public safety for city residents and restore its heritage.

Under the plan, the city said this investment will result in improved services and public safety and the clearance of blighted and abandoned properties with $1.5 billion dedicated to capital improvements over 10 years.

Up to $500 million of the $1.5 billion will be dedicated to blight removal over the next five years.

Since filing for bankruptcy, Detroit’s debt has been reduced by about $7 billion, its power grid has been transferred to a privately run utility and the Great Lakes Water Authority (GLWA) has been formed to improve and maintain Detroit’s water and sewer systems, according to a prior news release.

Kevyn Orr, Detroit’s emergency manager, said that “there is still much work to be done” in the city’s recovery, but feels “great confidence in Detroit’s future now that it will have the financial resources and discipline it needs to fulfill its vast potential.”

The plan also calls for the creation of a financial advisory board to ensure the plan is implemented in a sustainable way.

Detroit initially filed the adjustment plan on Feb. 21, 2014 with an eighth amended version filed Oct. 21 reflecting additional settlement agreements with Syncora Guaranty Inc. and Financial Guaranty Insurance Co. (FGIC).

Under its settlement, Syncora will receive two sets of new notes worth roughly $44 million due to be distributed on the effective date of the adjustment plan.

In addition, Syncora entered into a development deal with the city and will receive an operational lease for a Canadian tunnel.

FGIC also agreed to a development deal for the city’s downtown waterfront area and will receive about $74 million of new bonds from the city.

Creditor treatment

Specific treatment of creditors under the plan will include the following:

• Holders of water and sewer claims will receive either new bonds with a principal amount equal to the principal amount of existing bonds or cash in the full amount of the claim;

• Holders of revolving sewer bond claims will receive either new GLWA revolving bonds equal to the principal amount of the DWSD existing bonds if a transaction is completed or new revolving DWSD bonds equal to the principal amount of existing bonds if it is not completed;

• Secured general obligation claims, other secured claims, parking bond claims and HUD installment note claims will be reinstated;

• Previously disputed certificate of participation claimants will receive a proportionate share of a settlement asset pool or new B notes with a face value of about $97.69 million on the effective date of the plan as a result of the FGIC settlement;

• Holders of limited tax general obligation bond claims, other unsecured claims and Downtown Development Authority claims will receive new unsecured shares of new B notes and new C notes, for a 20% recovery;

• Holders of unlimited tax general obligation bond claims will receive a share of plan unlimited tax general obligation bonds, with a maturity that is no longer than the existing notes' maturity;

• Holders of convenience claims will recover 25% in cash; and

• Holders of subordinated claims will receive no distribution.

The City of Detroit filed for bankruptcy on July 18, 2013. The Chapter 9 case number is 13-53846.

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