Detroit: Now that Detroit’s emergency manager has laid out a tough road that could include a bankruptcy filing for the city, the bondholders, pension managers and others with a stake in the outcome are left to assess his next steps while seeking to minimise any possible losses.
Kevyn Orr faces a difficult task, for he must either coerce the financially troubled city’s creditors into cutting a deal that would leave many with just pennies on the dollar, or file for Chapter 9 bankruptcy, where his powers would be greater but the likelihood of long, costly litigation far higher.
Rather than a corporate setting, the city’s emergency manager is acting in a political realm where the interests of Detroit’s citizens and even credit ratings throughout the state of Michigan may hang in the balance.
There was a forceful start to negotiations with debtholders at a Detroit hotel on Friday, with the city represented by Orr saying it would stop making payments on some of its $18.5bn in debt, which would put it in default.
Orr also presented a proposal on Friday to creditors, bondholders, pension funds and union representatives, laying out his case for concessions from them in a plan that ran to 134 pages.
Orr told reporters on Friday there was a 50/50 chance of bankruptcy for Detroit, which would be a first for a major US city. At the same time, he insisted this was “not a jaded effort just to go through the process to get to a bankruptcy filing.”
The emergency manager’s proposal went to great lengths to detail the city’s financial ruin, declaring in a stark subheader: “THE CITY IS INSOLVENT” and cataloguing Detroit’s disastrous record of keeping its citizens safe and its streetlights on.
Detroit, the centre of the US auto industry, is the poorest large city in the country, with more than a third of its residents living below the official government poverty line. At a minimum, Orr’s opening move could be seen as part of a checklist he needs to tick off in order to meet legal requirements needed to declare a bankruptcy of America’s most troubled metropolis. But some restructuring experts see in Orr’s approach an attempt to put together a pre-packaged bankruptcy, a strategy that has been adopted for Chapter 11 bankruptcies in the corporate world but never before used for a municipality seeking Chapter 9 bankruptcy protection.
“Kevyn Orr is a bankruptcy lawyer and he’s going down a checklist of the things he needs to do,” said Michael Sweet, an attorney at Fox Rothschild who helped the city of Richmond, California, restructure its finances to avoid bankruptcy. “He’s keeping all the options on the table.”
A pre-packaged bankruptcy occurs when an entity has negotiated a deal with creditors and other interested parties in advance, put it into written form and received enough votes from creditors to get a judge’s approval — forcing it on objecting creditors. Pre-packaged plans greatly reduce uncertainty and legal fees.
Without a pre-packaged plan, Chapter 9 proceedings for the city of 700,000 could be lengthy, litigious and expensive, and cash-strapped Detroit would have to foot the bill. Proving insolvency and demonstrating a municipality’s inability to pay its bills would be critical to filing for Chapter 9.
“He (Orr) will get a pre-packaged plan,” said James McTevia of Michigan-based consulting firm McTevia & Associates.
Reuters
