City of Detroit Reaches Agreement with Certain Group of Insurers for Municipal Bondholders

After resolving many other aspects of Detroit’s chapter 9 bankruptcy case, mediators addressing the disposition of claims from certain debt holders set the path for a trial in which the bankruptcy judge will assess the fairness of the negotiated plan. Last week both assemblies of Michigan’s Legislature approved necessary funding for that plan. Now mediators assigned to negotiate between the City and insurers for bond holders who issued limited tax, general obligation bonds known as LTGOs have announced an unspecified agreement has been reached concerning the treatment of claims by these creditors.


This group of bondholders claims to be owed approximately $163.5 million. While they have taken the position their claims are secured by collateral, the City has rejected that notion. The distinction is not inconsequential. As in Chapter 11 bankruptcy reorganizations concerning insolvent corporations or Chapter 7 bankruptcies filed by wage-earning debtors, the characterization of whether a particular creditor’s claim is secured or not determines the priority given to that particular claim and ultimately the size of the percentage of such claim the creditor will likely receive upon discharge. The City’s view has been hotly contested by groups representing municipal bondholders. “It’s an enormous negative for general obligation bondholders to receive anything below par,” Matt Fabian, managing director of Municipal Market Advisors, a Concord, Massachusetts, research firm, said yesterday in a phone interview. “It implies more risk for general obligation secured bondholders in Michigan.”


But the mediators issued a vague statement implying these concerns have been addressed, indicating, “The settlement recognizes the unique status and niche of the LTGOs in the municipal finance market.” Because no details of the arrangement have been made public, it is too early to assess how these creditors have been treated relative to other creditors particularly pension holders and municipal employees.


By the time United States Bankruptcy Judge Steven Rhodes conducts a trial in August to determine whether the proposed plan is fair, he will take in to consideration the votes of the thousands of creditors involved and hear legal objections to any of its components. The purpose of this mediation was to reach agreements on outstanding issues before that trial so as to minimize or eliminate any legal issues which may derail the case from proceeding to the point at which the large municipality can exit bankruptcy.


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