Bond Markets

  • Beyond the Biggest Headlines: Bankruptcy stories we didn’t want to miss

    Next Chapter Detroit brings you a few of the bankruptcy-related stories from the previous week in the local and national media:

    The Million-Dollar Housing Market?

    The city’s auctioning of abandoned homes has generated more than $1 million in commitments, city officials reported this week.

    “The success of these auctions is another reminder of just how much demand there is for good homes in Detroit’s neighborhoods,” Mayor Mike Duggan said statement on June 26. “Within a matter of months, these vacant houses will become homes that will be adding to the strength of our neighborhoods.”

    As The Detroit News reports: Since May 5, the city has been selling homes on the The first auction generated 88 bids with a high of $34,100. For the past month, the land bank has been selling two homes per day.

    Speaking of Moving In…and Out of the City

    The New York Times and the Wall Street Journal published stories this week about whether Detroit’s population continues to move out or grow with new residents. The WSJ’s Marketwatch blog takes a somewhat analytical approach, comparing cities across the country on the basis of home affordability, tax rates and unemployment. Of course, the piece is also peppered with colorful anecdotes about Detroit’s reality with a hopeful tone.

    The Times, though, includes “up high” some of the facts that seem to fascinate much of the country: Detroit’s foreclosure rate (one in 10 properties this year) and the occasional starting auction price of $500 for a house. The Times also notes Detroit’s unusually high tax foreclosure rate, linking it to the city’s financial woes:

    “In some cases, homeowners have abandoned properties and simply quit paying taxes, and foreclosure may be the only way to get a house back into the hands of people who actually want to live there and pay their share. In other cases, those who lose or abandon their houses sometimes end up buying other houses at auction – sometimes for as little as $500 – and begin the cycle again, although new rules are aimed at taking back properties sooner if taxes are again not paid. Either way, the city fails to get all the tax revenue it is owed.”

    Lighting Up Detroit

    The June 25 sale of $185 million worth of revenue bonds for Detroit’s public lighting authority “had no problem finding buyers,” Reuters reports.

    “The bond issue, which was sold through the Michigan Finance Authority, was 2.5 times oversubscribed, receiving 35 institutional orders and several dozen more from retail accounts, according to a statement from Michigan officials.”

    In December, Citibank financed about $60 million in floating-rate bonds for the lighting system. The June 25 sale was the first public offering of Detroit debt for lighting since then, Reuters reports.

    Lessons Learned?

    What the Detroit bankruptcy “teaches” the rest of the world continues to be a common theme in media coverage and conversations about history’s largest Chapter 9 filing. This week, the Wall Street Journal’s Bankruptcy Beat blog covers some.

    Perhaps predictably, the WSJ did not address communicating with citizens or ensuring the process is explained as fully as possible for residents or retirees. But the “takeaways” author identifies are worth “putting on the record” as lawyers and journalists say. They are:

    Negotiate and make every attempt to avoid Chapter 9, but do not forego its potential rehabilitative benefits.

    Seek to organize creditor groups as soon as practicable and engage in meaningful negotiations.

    Understand the nature, full extent and potential value of the assets of the troubled municipality.

    Prior to any formal proceedings, develop a projected restructuring and business plan that would be feasible and would comply with the applicable principles and rules that govern Chapter 9.

    Establish, as early as practicable, the involvement of the state government as a party in interest.


  • WSJ: Detroit’s lessons to learn

    Detroit’s bankruptcy continues to offer a multitude of “teachable moments,” and this week, restructuring expert Lisa Donahue weighs in on the Wall Street Journal’s Bankruptcy Beat blog about how she thinks the Detroit Chapter 9 should be interpreted and what actions other municipalities and states should take based upon the experience here. She begins:

    Facing issues head-on is difficult, and it’s tempting to put off until tomorrow what should be done today. But it’s unwise. That’s perhaps the No. 1 lesson from Detroit—and one that applies as much to cities and other municipalities as to companies.

    Donahue, who works at Alix Partners, also opines that the election of Mike Duggan as mayor reflects  a “new spirit emerging in a grassroots way among Detroiters themselves.”

  • Bankruptcy: Bad News for Bond Insurers

    With demands to sell the Detroit Institute of Arts collection, hundreds of pages of legal arguments and a few successes at the negotiating table, The Detroit News reports five financial firms are “fighting for their survival” in the Detroit bankruptcy case.

    The reason is simple: These insurers will be left holding the bag for nearly every dollar cut from payments on the city bonds, a tab that could run to more than $2 billion. And after taking massive losses during the great recession, a big hit in Detroit’s bankruptcy could push at least one bond insurer to close its doors, notes Matt Fabian, managing director of bond analysts Municipal Market Advisors.

    One of those firms is Syncora Guarantee, a branch of the Bermuda-based Syncora Holdings Ltd., which insured the pension “interest rate swaps,” a deal settled for $200 million under its value.

    Syncora also is the creditor who subpoenaed massive amount of information from the Detroit Institute of Arts, Christie’s and the Michigan Attorney General as part of the Detroit bankruptcy case. Last week, the AG’s office provided documents, revealing officials there and at the DIA had been communicating about the issue of the artwork as collateral for creditors weeks before the bankruptcy was filed.

    Another of the bond insurers profiled in The News today is Financial Guaranty also known as FGIC. The company insured $1.1 billion of the certificates of participation in the 2005 and 2006 pension funding arrangement. Emergency Manager Kevyn Orr  has authorized a lawsuit seeking to void that deal. The News writes:

    FGIC filed a 1,027-page lawsuit disputing the city’s lawsuit that attempts to repudiate the COPs deal. FGIC accuses the city of turning “a crooked eye to history, revising the facts of the pension funding transactions and claiming that the city was the innocent victim of fraud perpetrated on a grand scale.”

    FGIC has filed court papers, urging the court to do “due diligence” in assessing the value of the DIA collection.

    Two other bond insurers, National Public Finance Guarantee Corp. and Assured Guaranty Municipal Corp., are negotiating a deal over the city’s water and sewer bonds. The News reports “Assured covers $1.6 trillion in those bonds, while National insures $1.8 billion, plus another $621 million with Berkshire Hathaway.”

    A fifth insurer, Ambac, “remains on the hook for the city’s limited-tax general obligation bonds, and was ordered to mediation on April 22.”

    In the last bankruptcy proposal, the city planned to settle at 10 percent to 13 percent of the $164 million in bonds, which would hand Ambac a loss of $82 million to $85 million. Ambac has strenuously objected.

    Ambac, along with Assured and National Public Finance Guarantee Corp., earlier reached a deal with the city reducing the trio’s $388 million claim to $287.5 million on general obligation bonds.

  • Details of Settlement: Mediators release deal terms

    The mediators in Detroit’s bankruptcy case released a statement this morning, describing terms of the deal reached between the city and three bond insurers. The agreement reduces the trio’s $388 million claim to $287.5 million and says the city “intends” to use the difference to support pensions, specifically those of the poorest Detroit retirees by ensuring they receive payments higher than the federal poverty level.

    That’s a 74 percent payout, far above the 15 percent proposed in the city’s latest Disclosure Statement. But the agreement gives the city one creditor class that is guaranteed to vote in favor of the bankruptcy plan, allowing the court to mandate the rest of the plan and its terms for other creditors, including pensioners.

    “The mediators are privileged to have played a role in assisting the parties to find common ground in reaching a resolution that reflects not only a fair settlement to the parties, but also creates an opportunity for the city to provide additional assistance to retirees,” the mediators’ statement reads. “…the Mediators hope that this settlement will encourage all of the remaining parties to the bankruptcy to re-double their mediation efforts to reach meaningful agreement which can be incorporated into a fair and balanced agreed-upon Plan of Adjustment to be presented to the Bankruptcy Court for confirmation.”

    The bond insurers involved are National Public Finance Guarantee Corp., Assured Guaranty Municipal Corp. and Ambac Assurance Corp. In November, they took legal action against the city voter-approved property taxes were being illegally diverted to the general fund.

    The deal will be reflected in the city’s next Disclosure Statement, due in bankruptcy court next week.

    4.9.14 Mediators Statement and Term Sheet

  • Michigan Radio: Who’s objecting to Detroit’s plans

  • A Detroit Deal?: Freep reports unsecured creditors to settle with city

    The city and insurers of general obligation bonds have reached a settlement, the Detroit Free Press reports this morning. Reporter Nathan Bomey writes the city could officially reveal terms of the settlement as soon as today. In the city’s most recent Disclosure Statement, Emergency Manager Kevyn Orr called for paying 15 cents on the dollar on unsecured bonds, which represent about $538 million of Detroit’s billions of dollars in debt and liabilities.

    Attorneys are not supposed to reveal details about the talks, but Free Press sources tell Bomey the settlement has been reached. The deal, if approved by Bankruptcy Judge Steven Rhodes, would make it easier for the city to force a settlement on other creditors, including pensioners.

    Bomey reports:

    The debt included $163.5 million in limited-tax obligations and $374.7 million in unlimited-tax obligations. A source familiar with the settlement — which was negotiated by bankruptcy mediators overseen by U.S. District Chief Judge Gerald Rosen — said the unlimited-tax bondholders will be treated better than limited-tax bondholders. The city won the approval of major bond insurers that will be forced to pay bondholders the difference of the full value of their bonds and the price the city pays when it exits bankruptcy. 

    Meanwhile, The Detroit News reports the city and bond insurers had intensified their negotiations since Bankruptcy Judge Steven Rhodes held a February hearing on insurers’ legal action against the city, a claim filed in November that asserted the city was “illegally diverting voter-approved property taxes to the general fund.” That suit was filed by bond insurers National Public Finance Guarantee Corp., Assured Guaranty Municipal Corp. and Ambac Assurance Corp.

    News reporter Chad Livengood writes:

    The bond insurers argued the tax revenue had to be segregated and used to repay bondholders who financed capital improvements of recreation, public safety, cultural, health and lighting facilities. … On March 24, attorneys for the three bond insurers and Detroit were ordered to attend a closed-door mediation session by Chief U.S. District Court Judge Gerald Rosen, the lead mediator in the bankruptcy case.

  • Watch Live: Understanding Detroit’s bankruptcy

    If you can’t make it to the Wayne State University Law School event today, “Detroit’s Bankruptcy and Beyond: Organizing for Change in Distressed Cities,” find the live stream here.

    The remaining schedule is:

    10:30 a.m. to noon: Panel discussion “Detroit: Historical Roots & Current Effects on Bankruptcy”

    Noon to 1:30 p.m.: Keynote Address by Angela Glover Blackwell, founder and president of PolicyLink.

    1:30 to 3:15 p.m.: Panel discussion “Distressed Cities: A National Perspective”

    3:15 to 4 p.m.: Keynote Address by Ronald Sims, senior professor of business administration at The College of William & Mary

    4 to 5:30 p.m.: Panel discussion “Working Within and Through Municipal Distress”


  • Bridge Magazine: Winners and losers among Detroit’s creditors

  • Orr’s Legacy: Lawsuits?

    It’s never too early to forecast a legacy, and in today’s Detroit News, guest columnist Paul Alexander boldly predicts Detroit Emergency Manager Kevyn Orr is paving a path toward litigation.

    …perhaps Orr’s legacy will be a plan that, instead of solving Detroit’s financial problems, will land the city in court fighting lawsuits for years to come.

    Pensioners losing income and health care, the Detroit Institute of Arts if the collection is sold, bondholders who held general obligation bonds that the EM reclassified from secured to unsecured…Alexander finds all have good reason to pursue litigation because of how Orr’s Plan of Adjustment proposes to treat them.

    Some have started the conversation:

    Union officials have promised a lawsuit over pension and health benefit reductions. Lawyers for bondholders and their insurers have promised lawsuits as well. Indeed, one insurer filed a lawsuit earlier this week.

    Detroit’s bankruptcy has been historic for any number of reasons. Perhaps its legacy of litigation will be added to that list.

  • A Detroit Lesson: Washington Post weighs in on what’s next

    Much has been made of the pensions versus art, Detroit creditors versus everyone in the city’s bankruptcy case. The sides are usually predictably drawn.

    But this weekend, the Washington Post weighs in with an editorial picked up by newspapers around the country. It recounts, of course, a bit of how the city got to this situation, citing “mismanagement” on several levels. Then, the authors get to the municipal bond-related portion of the story:

    Lenders have come to treat tax-backed municipal debt as nearly risk-free, and no doubt Detroit’s bankruptcy experience may cause some to reprice the risk of financing municipal governments, not only in Michigan but also around the country.

    That future, WaPo writes, may not “be an entirely bad thing” if the effect is better managed municipalities. Then we get the discipline that seems to have been so badly missing for decades:


    Surely banks that took fees to help Detroit fund its pensions with $1.4 billion in dodgy “certificates of participation”deserve to be taught a lesson. 

    We’ll see what kind of teacher Bankruptcy Judge Steven Rhodes is later this year.