Saturday, June 15, 2013

Moratorium Declared on Detroit Debt to the Banks

Detroit emergency manager: City is insolvent, needs moratorium on debt

The emergency manager appointed to reconfigure Detroit's bankrupt finances said Friday that the city is insolvent and the only way to bring it back into the black was to stop paying on some debt.

Kevyn Orr, appointed a few months ago to oversee the city's debt crisis, said holders should join in a "shared sacrifice" and give up their hopes for recouping all of their collective $17 billion owed by the city, The Baltimore Sun reported.

"Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin," Mr. Orr said, The Baltimore Sun reported. "We have presented a plan that outlines a comprehensive roadmap for ensuring basic services are delivered to our citizens while aligning our obligations with the reality the city confronts."

By putting a moratorium on principal and interest owed by the city for its unsecured debt — which includes $34 million in pension certificates that was due Friday — Detroit could save cash for necessary services, Mr. Orr said.

He also announced the creation of an oversight board to make sure the city's financial reforms are continued, The Baltimore Sun reported.

Read more: http://www.washingtontimes.com/news/2013/jun/14/detroit-emergency-manager-city-insolvent-needs-mor/#ixzz2WGe4wfWS
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Detroit defaults on up to $18.5 billion in debt to avoid filing for bankruptcy

Detroit defaulted on some debt on Friday and proposed most creditors receive just pennies on the dollar owed by the "insolvent" city in order to avoid the largest municipal bankruptcy filing in U.S. history.

REUTERS
FRIDAY, JUNE 14, 2013, 4:28 PM

Detroit defaulted on some debt on Friday and proposed most creditors receive just pennies on the dollar owed by the "insolvent" city in order to avoid the largest municipal bankruptcy filing in U.S. history.

In a forceful opening salvo of negotiations with holders of as much as $18.5 billion of debt, Detroit Emergency Manager Kevyn Orr announced a moratorium on some principal and interest payments, including one due on Friday.

Under his proposal, Orr said unsecured debt holders would be paid less than 10 cents on the dollar, but some creditors would get a bit more based on city revenue. Some $11.5 billion of the debt is unsecured and $7 billion secured, according to figures presented by Orr.

Orr said secured creditors would get better treatment, although how much better was not specified.

"We may try to get a discount from them, but the reality is they are secured," Orr said. Secured credit means an asset is pledged to back the debt, for example Detroit has secured its interest rate swap agreements with casino revenue.

He said the city would skip a $34 million payment due on Friday on $1.43 billion of pension certificates of participation, to allow the city to conserve cash needed to provide services to residents.

Fitch Ratings said this amounted to a default which would result in a downgrade of the credit rating on that debt.

"If the payment doesn't get made, we would downgrade the rating ... for default," said Arlene Bohner, a Fitch analyst.

"Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin," Orr said in a statement.

Orr said the city was "insolvent," unable to pay its debts, and needed shared sacrifices from everyone including debt holders, to have any hope of a revival.

Insolvency and inability to pay debts are two tests a government must meet for a judge to accept a Chapter 9 municipal bankruptcy.

"It looks and feels like a pre-packaged bankruptcy plan," said Richard Ciccarone, managing director at McDonnell Investment Management, in reaction to the proposal.

Orr, a bankruptcy attorney brought in by the state of Michigan to clean up the city's finances, repeated after the meeting that he sees a 50/50 chance of a bankruptcy filing.

It would be a first for a major U.S. city as New York, Philadelphia and Cleveland all avoided formal bankruptcy filings during their financial difficulties.

Creditor representatives leave a meeting with Detroit's emergency manager Kevyn Orr. Orr said that Detroit is asking creditors to take about 10 cents on the dollar of what they're owed.

New York also declared a moratorium on some debt payments in the 1970s, but creditors were ultimately paid in full under a restructuring agreement, said Jim Spiotto, municipal bankruptcy expert at law firm Chapman and Cutler in Chicago.

In addition to the financial details, the 134-page document presented on Friday describes collapsing city services, rising crime and falling tax receipts.

Detroit is the poorest large city in the United States with more than a third of its residents living below the official government poverty line, while its population has shrunk to about 700,000 people.

The city has the highest violent crime rate of any major U.S. city, some 78,000 abandoned and blighted structures, and 40 percent of street lights do not work, the document said. Only about a third of the city's ambulances were in service in the first quarter of 2013. Just 53 percent of owners paid their 2011 property taxes, it said.

Orr said unsecured creditors, including bondholders and pension funds, will receive a pro rata share of $2 billion of notes the city would issue and pay off as its financial circumstances improve.

An oversight board could be created for Detroit, similar to one created after New York City's financial difficulties, that would ensure reforms are sustained, Orr said.

City workers and retirees would also face changes to their pensions and health care coverage "consistent with available funding."

At the same time, Orr proposes investing $1.25 billion over the next 10 years to improve the city's infrastructure, remove or repair crumbling houses and update computer systems.

Initial reaction to the proposals from debt holders and labor unions was negative.

Emerging from the meeting, one bond holder who asked not to be identified, said of Orr's proposal to pay them only pennies on the dollar: "It's just too much. It is an unprecedented amount to ask."

In the past, bondholders have not lost the principal amount owed them as a result of financial restructurings of major cities.

Much of Detroit's debt is insured, giving bondholders protection against defaults. Two of the insurers, MBIA, Inc and Assured Guaranty, confirmed they attended the meeting.

Leaders of some of Detroit's 48 public sector unions were upset by Orr's proposals, which included spinning off the water and sewer services into an independent authority as well as making the changes to pensions and health care coverage.

"When you're backed into a corner, the only thing you can do is fight and the only way we can fight is to strike," said Mike Mulholland, secretary and treasurer of AFSCME Local 207, the union which represents water and sewer workers.

Read more: http://www.nydailynews.com/news/national/detroit-defaults-billions-debt-avoid-bankruptcy-article-1.1373116#ixzz2WGfKgnrh


Protesters demonstrate as EM Kevyn Orr meets with Detroit creditors

4:22 PM, June 14, 2013
By Tammy Stables Battaglia
Detroit Free Press

Kevyn Orr could put the squeeze on unions at meeting with labor leaders next week
Detroit retirees will move to Medicare or new exchanges under Affordable Care Act

About a dozen people protested at Detroit Metro Airporttoday, where Detroit emergency manager Kevyn Orr met with creditors this morning.

Orr arrived at about 8:20 a.m. for the 9 a.m. meeting, flanked by Michigan State Police officers. He said he hoped the day would unfold “nice and quiet.”

Protesters from the Moratorium Now Coalition, Detroiters Resisting Emergency Management and Detroit City worker retirees arrived just before 9 a.m. They were directed to a demonstration area at the other end of the McNamara Terminal, away from the meeting entrance at the Westin Detroit Metropolitan Airport hotel. The protested for roughly 2 hours.

Native Detroiter Andrew Newton, 29, said he feels the gathering — led by a state-appointed, unelected emergency financial manager — is “criminal.”

“We, as a city, vote against something, we have the right to say no to something — that’s what democracy is about,” he said.

“The governor is not a person that gets to just not listen to the people for his own rich-boy agenda. Orr is just an extension of the governor’s agenda.”

David Sole, 65, of Detroit, who retired in January from the Detroit Water and Sewerage Department, said he feels retirees and residents should play a large role in the discussions.

“The emergency manager’s meeting with the bankers and others to discuss how to pay the banks — the law that was passed to impose an emergency manager on Detroit says they have to pay the banks first,” Sole said.

“We’re saying, no; they need to pay people’s pensions, wages and city services. People should come before the banks.”


ANALYSIS AIR DATE: June 14, 2013

Abayomi Azikiwe, PANW Editor, Quoted in PBS story on Detroit Economic Crisis

To watch this segment just click on the URL below:
http://www.pbs.org/newshour/bb/nation/jan-june13/detroit_06-14.html

Painful Options Ahead: Detroit to Default on $2.5 Billion Debt

SUMMARY
The city of Detroit is facing difficult decisions in the face of billions of dollars of debt. Emergency manager Kevyn Orr laid out a last-ditch plan to 150 creditors to accept pennies on the dollar to keep the city running. Some residents are skeptical of Orr's approach. Ray Suarez talks to Matt Helms of the Detroit Free Press.

Transrscript:

JUDY WOODRUFF: Today, the city of Detroit and its creditors were presented with a series of painful options. Retired city workers were warned of significant cuts in pensions and health insurance, and creditors were told the city won't be able to pay them back.

The day started with an announcement that the government already defaulted on some debt. It got worse from there.

PROTESTERS: Make the banks pay. Make the banks pay.

RAY SUAREZ: A handful of protesters picketed outside the Westin Hotel this morning, while, inside, Detroit's emergency manager, Kevyn Orr, laid out a last-ditch plan to 150 creditors to accept pennies on the dollar in order to help keep the city running.

Orr told reporters afterwards that Detroit's finances are beyond dire and that his plan to avoid filing bankruptcy "is going to be hard, it's going to be difficult, but what choice do we have?"

During the meeting, Orr said the city would stop payments on its unsecured debt to bondholders, cut health care and pension benefits to current and retired city workers, give an independent authority control over the water and sewerage. The changes help tackle what Orr said was up to $20 billion dollars in debt and liabilities.

He was appointed three months ago by Michigan Gov. Rick Snyder to try to turn around Detroit's finances and operations. But there's been skepticism among some residents about the plans and about whether Detroit's finances are as dire as Orr has said.

Abayomi Azikiwe protested the meeting this morning.

ABAYOMI AZIKIWE, Protester: We feel that the bankers and the creditors who are here today with the emergency manager are not going to negotiate in the best interest of the people of the city of Detroit. And we are saying that the same financial institutions that Mr. Orr is negotiating with today are responsible in large part for the crisis that exists in Detroit.

RAY SUAREZ: Once a booming Midwestern city, Detroit has suffered a big population loss and now ranks as the poorest major city in the U.S. More than a third of the population lives below the government poverty line.

We get more on the plan spelled out today and the reaction to all this from Matt Helms of The Detroit Free Press.

Matt, welcome.

From the beginning, Kevyn Orr didn't sugarcoat the situation. But, even so, was something this extreme expected today?

MATT HELMS, The Detroit Free Press: Well, I think we'd been warned to expect something drastic, but that doesn't -- the warning certainly doesn't prepare you for the scope and the risks involved here, and, you know, especially the cuts that, you know, the creditors, retirees, pensioners, city workers are going to be asked to take.

RAY SUAREZ: Who are the main holders of Detroit debt and who is it that's being told to expect just pennies on the dollar?

MATT HELMS: It's everyone.

It's retirees. It's pension plans. It's the city's unions and representing current workers. It's bondholders, the insurance companies that backed those bonds. And bondholders can range from major institutional investors to, as one of the creditors told me today, mom and dad investing in a mutual fund.

RAY SUAREZ: How did Detroit get to be an estimated $17 billion to $20 billion dollars in debt? It's had shrinking revenues for some time. It's had very heavy legacy obligations for some time. Were there always institutions that were ready to line up and continue to lend the city money?

MATT HELMS: There certainly were. And they did up until last year, when the crisis hit.

And the last round of borrowing had to be backed by the state because Detroit's credit rating had really just gone into trash territory. The state helped float $137 million dollars in bonds to help stabilize the city through what they hoped was going to be an agreement to keep it out of the appointment of an emergency manager.

That didn't work. And here we are today perhaps just weeks away from a Chapter 9 municipal bankruptcy filing.

RAY SUAREZ: As we mentioned earlier, Kevyn Orr already announced that the city had defaulted on an obligation as of this morning. How much was it and to whom?

MATT HELMS: Well, it's to a number of creditors, but it was a nearly $40 million dollar payment on a complex structure, a finance structure called participant -- I'm sorry -- a certificate of participation obligation.

And we know that the city has also kind of triggered terms for default in the past as well, but has been able to negotiate with creditors to extend payment dates. And, you know, there's a long line of vendors, for example, who provide goods and services to the city who have gone months without payment.

RAY SUAREZ: Now, the emergency manager said the odds of a bankruptcy were 50-50. And, indeed, it would be the largest municipal bankruptcy ever. But why isn't Detroit considered bankrupt already?

If it missed a payment today and is telling people that it owes money, that it's only going to give them, in some estimates, 10 cents on the dollar, why isn't it already considered bankrupt technically?

MATT HELMS: Well, I guess, technically, it already is bankrupt, but as a spokesman for the emergency manager told reporters today, there's a difference between being bankrupt and being in bankruptcy. Bankruptcy is the process of resolving that debt.

And the -- really, the difference between the two is whether you go to court to resolve it.

RAY SUAREZ: Today, the spokesman for Kevyn Orr mentioned that they would give the institutions involved a couple of weeks to digest the news that they got today. It must be terrible to hear, but are there some hard-and-fast dates, some deadlines that are looming in Detroit's future that aren't the kind of things that you can give people a couple of weeks to think about? What's the next chapter in this drama?

MATT HELMS: Well, at best we can tell, if the negotiations don't go well, we could know within a couple of weeks whether Kevyn Orr thinks that there is no option but -- except for bankruptcy.

Beyond that, these talks, these negotiations with creditors could extend into July or August. And, you know, there are a lot of bankruptcy experts who say they doubt that an out-of-court settlement can be reached and that the best Kevyn Orr can hope for at this point is to get maybe 80 percent to 90 percent of the creditors lined up, so that when he goes in and files a Chapter 9 petition, he's got a majority of the creditors lined up, and that can help persuade a federal judge to get the recalcitrant creditors on board with the deal, even cramming down, in the jargon, terms on creditors who are so far fighting the deal.

RAY SUAREZ: Have any of the creditors been heard from today, any of the institutions you mentioned earlier that might be expected to get a lot less money back from the city?

MATT HELMS: Many of them are not commenting. We have heard a lot of from the city unions today. They're worried. They're scared. Their members face pay and benefits cuts.

And there is even talk that vested pensions, which under Michigan law typically are protected from being cut once you are a retiree, that that may not be the case here in Detroit, and that Kevyn Orr and the city of Detroit may have to battle in court if necessary to reduce pension benefits for retirees who are already living on fixed incomes.

RAY SUAREZ: Matt Helms of The Detroit Free Press, thanks a lot for joining us.

MATT HELMS: Glad to be here.

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