September 16, 2014 / 4:38 AM / in 3 years

Detroit reaches bankruptcy deal with fiercest creditor

DETROIT (Reuters) - Detroit on Monday officially settled with one of its fiercest creditors, removing a major hurdle for the city to exit its historic bankruptcy but possibly creating another delay in the trial on restructuring its $18 billion in debt and obligations.

A man walk past graffiti in Detroit, Michigan, December 3, 2013. REUTERS/Joshua Lott

The settlement with Syncora Guarantee Inc. – to be included in another version of the plan that will be released late Monday – leaves Financial Guaranty Insurance Co, which has $1.1 billion on the line, as the major holdout creditor.

To retool its case, FGIC asked Bankruptcy Judge Steven Rhode to pause the hearing for a week starting on Friday, after having witnesses testify through Thursday. Rhodes appeared likely to approve the request during Monday afternoon discussions.

The hearing began on Sept. 2 and is scheduled to stretch into October.

If FGIC settles with the city, the trial would be shortened. Still, the city must make the case that its restructuring plan is fair and feasible, requiring it to call numerous witnesses to testify on the soundness of its creditor settlements and financial projections.

David Heiman, whose law firm Jones Day represents Detroit, told Rhodes that Syncora and the city “have laid down their swords.”

In a court filing on Monday, Syncora confirmed a “comprehensive settlement” with the city that was still subject to “definitive documentation and resolution of other terms.”

Under the deal, Syncora will withdraw all of its objections to Detroit’s plan including appeals pending in U.S. District Court and the Sixth Circuit Court of Appeals, Heiman said.

Initially, the Syncora deal had hinged on the insurer settling claims and counterclaims with interest-rate swap providers UBS AG and Bank of America unit Merrill Lynch Capital Services.

But James Sprayregen, Syncora’s chief attorney at law firm Kirkland & Ellis, told a media conference call that was no longer part of the deal, and the swaps dispute will be resolved outside of the bankruptcy case. Syncora insured some of the city’s $1.4 billion of pension debt and related swaps.

He added Detroit will continue its litigation to void the pension certificates of participation (COPs).

If the city prevails, money it would have used to pay off the debt would flow into a trust for retiree healthcare, limited-tax general obligation bondholders and some miscellaneous claims. Sprayregen said the Syncora settlement would change those deals.

“That’s not our issue. That’s for the city to deliver,” he said.

On Monday, Rhodes said FGIC should have time to file objections to the upcoming version of the plan that incorporates both the Syncora settlement and an agreement on the water and sewerage department.

Meanwhile, the Detroit City Council on Monday unanimously approved an up to $275 million borrowing through Barclays Capital Inc to finance the city’s exit from bankruptcy.

The settlement with Syncora, which has a $400 million exposure in the case, comes in two parts: a financial resolution to the company’s objection to the plan and a development agreement.

Under the financial resolution, Syncora will see a 13.9 percent recovery on its pension debt claims, said Corinne Ball, a Jones Day attorney representing the city. That is slightly higher than the 10 percent recovery initially offered.

The payments will be covered by two note issues. The first, $25 million, is part of the litigation trust. The second, $21.3 million, will be paid with public parking revenue.

Ball emphasized any other creditor who settles with the city over the pension certificates claims will receive the same terms. That would include FGIC.

Syncora will also receive $5 million, coming from an account backed by casino revenue.

The development part of the deal gives Syncora an extension of its lease on part of the tunnel connecting Detroit to Canada, options to acquire six lots to develop, a $6.25 million credit toward acquiring city assets and control of a major parking garage.

(The story corrects reference to FGIC in paragraph 2, clarifies Detroit’s attorney.)

Additional reporting by Karen Pierog in Chicago and Peter Suciu in Detroit; editing by Matthew Lewis, Cynthia Osterman and Stephen Coates

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