Detroit’s high-priced bankruptcy lawyers think a revised deal that pays large banks almost 60 cents on the dollar will win approval from the judge who rejected a previous arrangement that was even more generous to the banks.
The deal in question relates to $300 million in loans the city has to pay back to UBS and Bank of America. Emergency manager Kevyn Orr originally wanted to pay UBS and Bank of America roughly $230 million — between 75 and 82 cents on the dollar, according to The Bond Buyer — in a deal that U.S. Bankruptcy Judge Steven Rhodes rejected. At $165 million, the new deal is cheaper for the city, but that is no guarantee of Rhodes’ approval as the judge’s objections seemed to have more to do with the process than the price. Rhodes said the city made the deal “with a gun to its head,” and insisted that Detroit and the two banks not only renegotiate the terms of the deal but that they return to his courtroom prepared to show in detail how any deal with the banks is better for the city than its alternative, which is to sue to get the loans canceled outright.
While $300 million may seem minuscule next to a total of $18 billion in unpayable debts, this deal is central to the city’s bankruptcy plan. When Detroit made the loans in question it promised to use revenue from area casinos as a last resort repayment mechanism in the event of a default. Now bankrupt, the city needs that casino money to finance basic services and operations in the short term, making the resolution of this debt a high priority for Orr and his $28 million team of consultants and lawyers.
Because the debt is attached to that collateral, the megabanks are considered “secured creditors” and are therefore legally entitled to get a somewhat better deal than the city’s “unsecured creditors,” a category which includes more than 20,000 retirees who depend upon the modest pensions they were promised. Orr has proposed paying retirees about 16 cents on the dollar of what the city owes them, and has announced that retiree health insurance plans will be canceled in the new year.
Any improvement in the terms of Orr’s deals with secured creditors like UBS and Bank of America should in theory create space for his team to be less stingy in its eventual deal with pension funds. But Orr and other officials have been adamant that pensioners will have to accept cuts no matter what. That position isn’t merely unjust, given that retirees and pension promises did not cause the city’s financial problems despite Orr’s apparent efforts to exaggerate the pension funding gap. The cuts are also unwise for the city’s future economic prospects, which experts say depend primarily upon its ability to retain and concentrate its population.
A lawyer for Detroit’s pension funds said Thursday he will fight the new casino funds proposal, labeling it “far too rich” and “a huge windfall” for the banks.