Could Detroit strong arm its creditors?

Dan Weissmann Mar 4, 2014
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Could Detroit strong arm its creditors?

Dan Weissmann Mar 4, 2014
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Last night, the city of Detroit announced that it had reached a possible deal to pay about 30 cents on the dollar for about $288 million of debts owed to UBS AG and Merrill Lynch Capital Services. 

That’s a relatively small part of the city’s roughly $18 billion in debt. But it could be a huge deal. 

As long as Detroit has a deal with one creditor (or in this case, two), it can ask the judge, Steven Rhodes, to force all the others to accept the city’s proposed terms—an arrangement called a “cramdown.” 

Those terms are on the table, in a plan filed with the bankruptcy court by the city’s Emergency Manager, Kevin Orr, on February 21. Orr’s plan calls for some cuts to pension payouts—up to 26 percent for some retired workers.

The pension funds and unions have said “No way.”

But, as Orr has emphasized, there’s a carrot attached: More than $800 million from private donors, foundations, and the state of Michigan. (The Detroit Institute of Arts would also get some protection—remember, some people have talked about selling off its collection.)

That money won’t come through unless the pensions have to accept the cuts the city has already proposed. Otherwise, Orr has warned, the cuts could get worse.

The city’s plan also hits other creditors very hard. Some of them would get back just 20 cents on the dollar, which could also be a big deal, beyond Detroit.

Investors have thought of municipal debt as being really safe, which is how cities get to borrow money to build bridges and schools and stuff. A precedent like Detroit proposes — allowing  a city in trouble to write off 80 percent of its debts — could change all that.

Judge Rhodes has been issuing deadlines. Parties have until March 28 to file any objections to the city’s plan.  

And he’s set a trial date: June 16. He says he wants everybody to negotiate everything they possibly can before then.

The city says it hopes to get out of bankruptcy by September—so the clock is ticking.

For now, the city needs Judge Rhodes to approve this proposed deal with UBS and Merrill Lynch. He rejected two earlier proposals, which would have given the banks much higher payments. 

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