Detroit tries to salvage its finances

On Friday, Detroit Emergency Manager Kevyn Orr, a bankruptcy lawyer hired to manage the city’s troubled finances, unveiled his plan to try and keep the municipality out of bankruptcy. And it’s not pretty.

The Wall Street Journal story offered these details:

The city of Detroit told some debtholders on Friday they will have to accept pennies on the dollar or risk getting drawn into the largest U.S. municipal bankruptcy ever.

Kevyn Orr, the bankruptcy lawyer hired by Michigan Gov. Rick Snyder to lead the restructuring of Detroit’s troubled finances, told representatives of the city’s creditors that the city plans to stop making payments on some of its debts, starting with a $39.7 million payment that was due Friday, and won’t make payments in the foreseeable future on at least $2 billion in unsecured municipal debt as part of a move to save cash.

The total bill for the city’s long-term liabilities is nearly $20 billion, and the city is now insolvent, according to Mr. Orr. His decision to suspend debt payments could serve as a trigger for Chapter 9 bankruptcy filing in a matter of months, and the plan for the city of about 700,000 that he unveiled on Friday could serve as a road map under bankruptcy.

Over the next 30 days, Mr. Orr plans to negotiate with dozens of bondholders, insurers, unions and pension funds. If enough of those groups balk at the plan, they could help force a Chapter 9 bankruptcy. It is still possible—but increasingly unlikely, say people familiar with the matter—that a negotiated settlement can be reached outside of bankruptcy court.

At most risk is the $11 billion in unsecured debt. That includes almost $6 billion primarily in health benefits for retired city workers; more than $3 billion for retirees’ pensions; and about $530 million in general-obligation bonds. Retirees are set to get less than 10% of what is owed them under the plan.

The Forbes story led with a bleak quote from Orr on the city’s plight and outlined the five areas he will focus on changing: debt, pensions, water, lower taxes, and parks and parking:

“Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin,” Orr said in a statement.

The restructuring plan sets a timetable of meetings beginning June 17 with creditors, and an evaluation period ending July 19. Most experts think it would take the city at least six weeks to draft a Chapter 9 filing, and the situation is likely to require negotiations with the state, as well. That means a long, difficult summer for the city before any resolution takes place.

The USA Today story offered this interesting historical context for the city’s struggles:

Legal experts say the Detroit case could establish new case law because it would be the largest Chapter 9 petition in U.S. history and municipal bankruptcy has been a last resort used infrequently — fewer than 700 times since the 1930s. The largest bankrupt city so far is Stockton, Calif., with a population less than half Detroit’s and debts that are just a fraction of those here.

“This is foreign territory for everybody,” said Doug Bernstein, who leads the banking, bankruptcy and creditors rights practice for the Plunkett Cooney law firm in Bloomfield Hills, Mich. “The attorneys are in uncharted territory; the judges are in uncharted territory, if (a bankruptcy petition) ever gets filed.”

Among those watching are bond markets, the people who loan money to cities by buying their bonds.

Marilyn Cohen, president of Envision Capital Management in Los Angeles, said Friday that the municipal bond world is on high alert for the outcomes of Detroit’s financial meltdown and how — and at what level — the city’s creditors are repaid. Investors and analysts will look for clues to how what happens might impact future U.S. municipal bankruptcies that she said are inevitable among local governments with debts and retiree liabilities they can no longer afford.

The Reuters story went to great lengths to show the distress of Detroit’s finances and the hard task Orr faces:

Orr told reporters on Friday there was a 50/50 chance of bankruptcy for Detroit, which would be a first for a major U.S. city. At the same time, he insisted this was “not a jaded effort just to go through the process to get to a bankruptcy filing.”

The emergency manager’s proposal went to great lengths to detail the city’s financial ruin, declaring in a stark subheader: “THE CITY IS INSOLVENT” and cataloguing Detroit’s disastrous record of keeping its citizens safe and its streetlights on.

Detroit, the center of the U.S. auto industry, is the poorest large city in the country, with more than a third of its residents living below the official government poverty line.

At a minimum, Orr’s opening move could be seen as part of a checklist he needs to tick off in order to meet legal requirements needed to declare a bankruptcy of America’s most troubled metropolis. But some restructuring experts see in Orr’s approach an attempt to put together a pre-packaged bankruptcy, a strategy that has been adopted for Chapter 11 bankruptcies in the corporate world but never before used for a municipality seeking Chapter 9 bankruptcy protection.

To say that Orr faces a difficult task is quite the understatement. But it remains to be seen if he can keep Detroit out of bankruptcy and if any part of the plan will be acceptable to creditors and pensioners. The world will be watching since whatever happens there will be a lot of eyes watching the outcome.