Much like in baseball, bankruptcy is a marathon not a sprint.
This was the admonition Plunkett Cooney Bankruptcy Practice Director Doug Bernstein has counseled me from the beginning, long before Kevyn Orr pulled the trigger on Detroit’s historic ride into receivership. When interviewed, veteran baseball players will say they never get too high and never get too low because it is a long season. Bernstein says pretty much the same thing every time we speak, which is almost daily anymore.
My blog from last night laid out all of the concerns regarding Detroit’s bankruptcy, how the "oh-no" chorus continues and that along with the mounting objections to bankruptcy leaves you thinking this an impossibly difficult mess that can’t be fixed even by bankruptcy. Bernstein’s patience was born out by today’s movement in the case.
The City of Detroit struck a mediated agreement with Unlimited Tax General Obligation bond holders. They have a $388 million claim against the city and will end up taking a $.26 on the dollar haircut to settle the claim. In other words, they’re getting $.74 on the dollar as a payoff, a far cry from the $.15 Kevyn Orr was offering all bond holders in his plan of adjustment.
You now understand why they agreed to terms. But there is an interesting wrinkle here. The entire claim will end up being paid. These were insured bonds so the expectation is the bond holders will be made whole by their insurers, much like what happens when you have a car wreck and the insurance company pays for your totaled car up to its value minus a deductible. When that happens a $100 million fund will then be created as a way to help pensioners who would otherwise fall below the federal poverty line keep afloat. While individual payouts won’t amount to a lot of money each month, this solves two problems for the city’s desire to win over pensioners.
One is that Kevyn Orr can say with authority he does care about what happens to Detroit’s pensioners considering there is now nearly $1 billion amassed to help them in this disastrous bankruptcy. It also gives Orr a reason to tell pensioners it truly is in their best interest to vote yes on his plan of adjustment when the ballots go out in a couple of weeks.
But this deal also makes for an interesting chapter in the case. The bond insurers are likely going to be furious at this deal and object heartily in court. The deal was mediated by Judge Rosen and it was his office that announced the settlement. But that announcement is nothing if not premature.
Judge Steven Rhodes is the final arbiter on whether the deal lives or dies. He has previously blown up a mediated deal, so there is no guarantee he will go along with this scheme. The other important corner of this story is the fact that the bond holders in this settlement will be voting to approve Kevyn Orr’s plan of adjustment. That would mean there would be a so-called “impaired class” in the bankruptcy which could allow Orr to do what’s called in bankruptcy circles a “cram down.” That is, after the first impaired creditors settle, the city can force other creditors to take haircuts at the same rate.
In this case you would expect everyone wishing for a cram down at $.74 on the dollar. But it’s never that simple. There is still the SWAPS case where the settlement is more like $.30 on the dollar payout which would also clear a pathway to a possible cram down. The objectors jump to the podium inside federal court at the first hint of a possible cram down. Expect more of this behavior in the weeks and months to come.
Then there was the other bombshell dropped today. Several massive filings by those same objecting bond holders and their insurance companies asked Judge Rhodes for a hearing to argue the merits of allowing them to find their own buyers for DIA art. The claim is that four different companies, one from as far away as China, are interested in and willing to buy the DIA’s collection for as much as $2 billion. That is a lot of money the bond holders would like to get their hands on. They are quite serious, too.
Download to read: Motion regarding DIA/interested parties
The filing included three color pictures, pie charts, breakdowns, timelines and a full listing of the Christie’s evaluation of the DIA collection with the approximate dollar values of the particular paintings and sculptures. They want Judge Rhodes to allow them to send in their own experts and get their own art valuations. Judge Rhodes has previously said he does not believe selling the art is a good idea or a true financial solution considering the city needs to be operative and functional when it emerges from bankruptcy later this year. He was not especially swayed the last time he heard this argument in court but these are very highly paid and top quality lawyers making their cases. We will have to see whether they have moved the Judge in the months since this last came up. We should get a better idea on Friday when a very full day of bankruptcy hearings is expected.
I will be there with my ongoing blog as the issue expected to be heard is Judge Rhode’s ruling on whether the SWAPS deal is a good one. Stick with Local 4 for all of your bankruptcy coverage, because as we saw today, what a difference a day truly makes!
The marathon continues.