Detroit —Federal mediators will try to broker a series of deals Thursday that could piggyback on a breakthrough settlement in hopes of ending the city’s bankruptcy case.
Chief U.S. District Judge Gerald Rosen, lead mediator in the city’s bankruptcy case, on Wednesday ordered Detroit’s legal team and lawyers representing financial creditors to attend closed-door negotiations today in federal court.
The talks carry added significance since U.S. Bankruptcy Judge Steven Rhodes on Wednesday halted the city’s bankruptcy trial until Monday to give Detroit and creditors time to negotiate an end to the biggest municipal bankruptcy in U.S. history.
The city’s fiercest holdout creditor, bond insurer Syncora Guarantee Inc., meanwhile, reflected on the last-minute deal that turns the firm and Detroit from adversaries into partners in a hoped-for recovery.
“It is interesting and ironic that we are both part of Detroit’s future,” Syncora attorney Stephen Hackney said Wednesday. “It feels better to be loving rather than fighting.”
The fight lasted 14 months. During that time, Syncora fought to liquidate the city’s art collection, tried to block repairs to miles of broken streetlights and leveled a “blistering” personal attack on federal mediators that drew a rebuke from the judge.
Syncora’s strategy, Hackney said, wasn’t to target the Detroit Institute of Arts collection in hopes of loosening the city’s grip on less high-profile and cherished assets, including a parking garage in Grand Circus Park and the Detroit-Windsor tunnel.
“I can’t say we’re that Machiavellian,” Hackney said, “or smart.”
Under the deal, the city agreed to extend a lease of the Detroit-Windsor tunnel with a Syncora-controlled firm for 20 years. Syncora also gets to lease a city-owned parking lot underneath Grand Circus Park for 30 years, according to a city term sheet released Wednesday. The package of incentives is worth about $70 million, according to a source familiar with the deal.
In return, Syncora has pledged to help Detroit fight bond insurer Financial Guaranty Insurance Co., which is still objecting to Detroit’s debt-cutting plan.
Syncora and FGIC were two of the biggest opponents in the bankruptcy trial. Both firms claim the city’s debt-cutting plan pays them as little as 6 cents on the dollar for the $1.4 billion in troubled pension debt they insured to help former Mayor Kwame Kilpatrick prop up the city's pension funds in 2005.
$1.1 billion in claims
FGIC has claims of more than $1.1 billion — three times the size of Syncora’s. The firm’s negotiators walked out of closed-door talks with the city two weeks ago.
In a statement Wednesday, FGIC said the firm remains open to a good-faith settlement following the Syncora deal.
“The latest deal reinforces our view that the city has abundant sources of incremental value available ...,” the company said. “However the issue at hand is their willingness to distribute this value fairly and equitabl y...”
Matt Fabian, managing director of Municipal Market Advisors, an independent bond research firm, says getting agreements with either or both Syncora and FGIC will be instrumental in getting Detroit’s bankruptcy resolved.
Syncora, he noted, is in the same creditor class as FGIC, which would have to be awarded a value that’s comparable.
“The city probably has an idea of what that will be,” he said, adding otherwise they likely wouldn’t have signed with Syncora. “I’m assuming they have some type of plan to offer FGIC.”
Fabian added agreements are critical to shortening the trial and minimizing the follow up litigation that could result from it.
“Syncora and FGIC have made pretty good cases,” he said. “They might be right, they might be wrong. But they can drag things out. It’s important to get them onto the side of settlers.”
City bankruptcy attorney Heather Lennox told Rhodes on Wednesday that Detroit will need to file an updated debt-cutting plan that will incorporate the Syncora deal.
“We don’t expect the changes to be extensive in terms of verbiage, but will be significant in terms of settlement,” Lennox said.
Syncora’s new allowed claim is $201.5 million, down from about $400 million. In all, Syncora boosted its recovery from 6 cents on the dollar to roughly 26 cents on the dollar, sources said.
Rhodes, however, has rejected other settlements during the bankruptcy case and forced Detroit to strike less generous deals. He must approve the Syncora deal. The Detroit City Council also must approve the real estate transactions with Syncora.
Untangling past deals
Thursday’s closed-door negotiations will likely focus on untangling the Kilpatrick-era pension deal.
Detroit has been trying to get the entire $1.4 billion in debt Syncora and FGIC insured wiped from its balance sheet, claiming the debt illegally exceeded the city’s statutory borrowing limits. But the city made contingency plans to pay only $162 million if Rhodes found the debt scheme to be legal.
If Rhodes were to wipe out the debt, the city proposed splitting the proceeds of the $162 million fund, with 65 percent going to retiree health insurance, 20 percent going to limited general obligation bondholders and the remainder parceled off for other unsecured creditors.
The deal calls for Syncora to get $23.5 million from the $162 million pool of settlement funds.
Syncora wants banking giants UBS AG and Bank of America to drop their pursuit of a nearly $200 million insurance claim against Syncora tied to the troubled pension debt.
Syncora has signaled its deal with the city hinges on getting the banks, retirees and bondholders to forgo a potentially better recovery of what they’re owed, a likely topic of negotiation in mediation .
“(The break) will be useful to work on definitive documentation and allow the other parties to reassess their path forward in light of these recent developments,” city bankruptcy lawyer Thomas Cullen said.
The morning after Syncora reached its deal, the firm’s lawyer Ryan Bennett said the proposed settlement would ensure that Syncora-owned American Roads, the parent company of Detroit Windsor Tunnel LLC, would keep its headquarters and workforce of 100 in the city and “expand its presence in Detroit.”
If Syncora’s deal with the city is approved, Bennett said, it will not only provide Syncora with recovery on the swaps claim, but spur investments in city properties. The deal requires Syncora to make $13.5 million in upgrades over five years to the Grand Circus parking garage.
If the settlement goes through, Bennett said, Syncora will “stand down” and “come over and support the city.”