Detroit's bankruptcy gets very creative again

DETROIT – We first were tipped something was afoot in the morning bankruptcy status conference.

Heather Lennox, a Jones Day attorney representing the city of Detroit, told Judge Steven Rhodes, "We have a significant settlement that may affect the conduct of the trial."

The trial is the bankruptcy trial scheduled for Aug. 21. It will determine whether Detroit can exit bankruptcy. I tweeted at that time it sounded like a water department deal was brewing and it was.

Lennox added the city, as a result of this settlement, may have to change its plan of adjustment and make a sixth amended plan filing. The city has turned in five separate versions of its plan to move forward post-bankruptcy. A sixth is a major amount of work and it would take a truly significant change in the city's financial projections to bring another amended plan to the court.

Then, after the morning's bankruptcy court status conference, Judge Rhodes held a closed hearing for all the lawyers involved in the Detroit Water and Sewerage Department litigation. Something was up and we went to work to find out.

View/download: Detroit water department's press release on bonds plan

Local 4 found a hastily-called special Detroit Water and Sewerage Board meeting this afternoon. We went and waited in the hallway while the finishing touches on the deal were hatched. Then they opened the doors and we were the only media in the room as the board discussed its game-changing plan.

It is complicated, high finance.

The DWSD has about $2.4 billion in outstanding water bond debt and another $2.8 billion in sewer debt. In a nutshell, the city will make what's known as a "tender offer" to the bondholders and in turn the bond insurers, who stand to lose millions in bankruptcy. The city will offer to buy back the entire $5.2 billion in outstanding bonds. The purchase price is likely to be higher than the losses the city is all but guaranteeing in bankruptcy. This all serves to try and end around bankruptcy court altogether. If enough bondholders say yes to the deal and there are large enough savings as a result, the city will move ahead with the deal.

If successful, it will do a lot of good things for the city and its bankruptcy. First, it should free up large amounts of cash necessary to rebuild. Whether it's the broken down DWSD pipes or the city's operation remains to be seen. A deal would likely shorten the bankruptcy trial because a lot fewer bondholders and insurers will object to the plan; the city can exit bankruptcy much quicker. For you at home, the likelihood of skyrocketing water bills becomes less threatening.

Now that the water board approved the plan, the clock starts ticking tomorrow on a two week offer period for bond holders to decide whether to get onboard and move outside of bankruptcy. Then the city needs to make a quick decision whether to move ahead.

This all sounds wonderful and it was cobbled together and blessed by chief mediator and Judge Gerald Rosen. The negotiations were conducted with Kevyn Orr heavily involved. But there are many moving parts and as we have seen there is nothing in this bankruptcy that could be thought of as a slam dunk. This deal will need approval from Orr, City Council, the State Treasurer, the Michigan Finance Authority and ultimately Judge Steven Rhodes.

The Michigan Department of Treasury's Terry Stanton offered this statement:

"What I can tell you at present, from a MI Finance Authority perspective is, the Authority (MFA) is aware of a proposal that would request the issuance of bonds (by the MFA) on behalf of the City of Detroit as it looks to restructure debt related to its Water and Sewerage Department.

The MFA has not received a formal request, and it wouldn't be prudent to speculate on what action the MFA might take on such a request, or to comment further, until MFA members receive information about, and have an opportunity to consider, the proposed transaction."

There is any number of ways this could slide off the rails over the next few weeks. But those involved, particularly those at the Water Board of Commissioners today, called this a transformative event. It's a bit of a jaw dropping suggestion that a broke city could buy back bonds, but the water department seems to have the wherewithal to go to the public markets, buy bonds at good rates, make the bondholders and their insurers as whole as they can and the city is left to be able to bounce back with some jingle in its pocket. It's nearly as creative as the grand bargain. If it works, it's genius. It not, well it's back to the drawing board and the slow slog that is trying to ford this bankruptcy stream.

This truly changes the game and may smooth the way out of the shackles of bankruptcy for Detroit and show other cities certain to end up in Chapter 9 how it's done.

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