Friday, October 25, 2013

Bank Debt Drove Detroit Into Bankruptcy

October 24, 2013 at 7:23 pm

Bank Debt Drove Detroit into bankruptcy

Chad Livengood and Robert Snell
The Detroit News

Protesters spilled out onto Lafayette Boulevard in front of the Theodore Levin Federal Courthouse on Wednesday

Detroit — A city financial consultant testified Thursday the threat of a massive multi-million pension debt payment to two banks through a deal engineered during former Mayor Kwame Kilpatrick’s administration helped drive city into bankruptcy.

Testifying in the second day of the city’s historic bankruptcy eligibility case, investment banker Ken Buckfire said consultants began contemplating Chapter 9 bankruptcy as early as January to protect the city from having to pay UBS AG and Bank of America termination fees for a 2006 troubled pension deal estimated to exceed $300 million.

A default on $50 million in annual payments for interest rate swaps would have caused the banks to seize $15 million in monthly casino revenue, causing layoffs and cutbacks of city services, Buckfire testified Thursday in U.S. District Court.

“We had to consider Chapter 9 as an alternative to protect the city,” Buckfire said.

City officials have estimated the immediate termination payment to UBS and Bank of America at $300 million, but the banks have accepted Emergency Manager Kevyn Orr’s offer to settle the debt for $230 million. The two banks are considered secured creditors after city leaders pledged casino revenues in 2009 as collateral to avoid a $400 million termination of the swaps deal in a previous bid to avoid bankruptcy.

The testimony comes three days after the Detroit City Council rejected Orr’s proposal to borrow $350 million to finance the termination payment to the banks.

Proceedings Thursday were dominated by lengthy testimony of three city financial consultants who bolstered the city’s contention that Detroit is insolvent and exhausted all options before filing for the largest Chapter 9 petition in U.S. history.

Restructuring consultant Charles Moore testified his firm Conway MacKenzie found “a number of departments that were severely broken.”

“As a result of cost cuts, many departments couldn’t provide the most basic functions and had an inability to get property tax bills out,” he said.

Some of the city’s unions have claimed Detroit didn’t make enough efforts to cash in on the city assets, such as the Detroit Water and Sewerage Department.

Buckfire disclosed that private equity firms have inquired about buying the water department, “but only if they charge higher rates” to Metro Detroit customers. Instead, Orr may transfer the department to a new authority.

The Coleman A. Young Municipal Airport is “worth nothing” without massive investment, Buckfire said. Joe Louis Arena is obsolete and there has been no interest among potential buyers, he said.

The eligibility trial got bogged down Thursday in a litany of financial issues as the city’s attorneys worked to establish insolvency and good faith negotiations to resolve debts out-of-court — two of the biggest hurdles for getting Judge Steven Rhodes to grant the city eligible for bankruptcy.

Rhodes was mostly quiet throughout the day, responding to objections and asking clarifying questions. But at one point he questioned why the city wasn’t offering expert testimony about its insolvency rather than witness testimony from paid consultants.

“It’s hard for me to comprehend why you didn’t offer the Ernst and Young witnesses who prepared these (financial) projections as experts,” said Rhodes, referring to a city financial consulting firm.

United Auto Workers attorney Peter DeChiara questioned financial consultant Gaurav Malhotra about a series of meetings between June 14 and July 18, the day of the bankruptcy filing. Malhotra acknowledged he and others dispatched to meet with city unions and pension funds were not authorized to negotiate concessions with key Detroit creditors.

Malhotra took a dim view of selling city assets, arguing that sales would not change the city’s structural financial problems.

“Those are one-time proceeds from asset sales that do not address the issues of the ongoing operating disbursements and the legacy cost disbursements, the combination of which exceed receipts,” Malhotra said.

What’s next

Investment banker Kenneth Buckfire faces cross examination this morning from city unions, retiree groups and pension funds. Police Chief James Craig and Emergency Manager Kevyn Orr are the city’s last witnesses and could testify today or Monday.

U.S. Bankruptcy Judge Steven Rhodes has set aside four hours Monday afternoon for Gov. Rick Snyder to testify about his authorization of the bankruptcy.

The judge signaled Thursday he is not likely to rule whether Detroit is eligible for Chapter 9 bankruptcy relief until at least mid-November. Rhodes invited the city and creditor attorneys to file briefs by Nov. 13 about whether to consider labor or bankruptcy legal standards should for evaluating whether Orr’s team conducted good faith negotiations prior to the July 18 bankruptcy filing.

Detroit must satisfy four requirements to be eligible for Chapter 9 relief: state authorization to file for bankruptcy; insolvency; negotiations in good faith with creditors and a desire to reduce debts.

From The Detroit News:

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