Detroit —Bond insurers say they’ll continue fighting the city’s plan to dump $7 billion in debt and favor pensioners over financial creditors, but chances are they’ll find fewer allies alongside them.
Results from a historic vote among retirees and other creditors, released near midnight Monday and overwhelmingly in support of the so-called “grand bargain,” clarified the legal battle ahead of an Aug. 14 trial on Detroit’s debt-cutting plan. And it highlighted the isolation of a few creditors who face millions in potential losses.
“If more ballots had come in against the plan, I think that it might have caused bond insurers to feel more empowered to fight,” said Michael Sweet, a San Francisco bankruptcy attorney who is following Detroit’s case. “But now you see they’re more isolated.”
That isolation could grow.
On Tuesday, city bankruptcy lawyer Beth Heifetz said Detroit hopes to reach settlements “soon” with other holdouts, including the Detroit Fire Fighters Association, the United Auto Workers and a group of active and retired workers fighting pension cuts.
George Orzech, a trustee with the Police and Fire Retirement System and a battalion chief in the fire department, says he expects the firefighter union contract will be resolved by the end of the month.
A resolution should be reflected in the city’s next version of its debt-cutting plan to go to U.S. Bankruptcy Judge Steven Rhodes before trial, he said.
“You’ll have no opposition (at trial) from either of the retirement systems or any of the unions and a lot of the bond holders,” he said.
The vote totals showed big, but not complete support from creditors. At least four classes of creditors rejected the city’s cost-cutting plan, leaving some disputes unsolved during a projected five-week plan confirmation trial next month in front of Rhodes.
About 82 percent of retired and active Detroit police and firefighters who voted overwhelmingly approved the city’s plan to reduce their inflationary increases but preserve their base pensions, according to balloting results filed late Monday in U.S. Bankruptcy Court.
Orzech said the outcome is a relief.
“I’m glad that they voted the way they did to get the best deal they possibly could at this point,” he said.
Members of the General Retirement System approved the city’s plan on a margin of approximately 73 percent “yes,” 27 percent “no” during a historic 60-day vote that ended July 11, the results show. Detroit’s plan calls for base pension cuts for GRS members of 4.5 percent.
Detroit also got 88 percent of retirees owed lifetime health insurance benefits to accept $450 million for a $4.3 billion liability — one of the biggest debts the city could shed if the reorganization plan is approved by Rhodes.
Officials with the general pension fund commended members, retirees and beneficiaries for approving the plan.
“We believe we helped negotiate the best possible deal up for a vote and approval of this plan is the most favorable outcome to a very difficult and uncertain situation,” Tina Bassett, a GRS spokeswoman said in a Tuesday statement. “While no one is happy that our pensions have been reduced, the plan does provide for the opportunity of restoration of our benefits.
“We believe this plan should be confirmed so the city of Detroit can get out of bankruptcy and begin working toward a more solid and better future.”
Syncora Guarantee Inc. and Financial Guaranty Insurance Company, the backers of a troubled pension debt deal, rejected as Class 9 the city’s plan to pay them pennies on the dollar for a $2.3 billion claim.
The insurers have attacked the city’s plan as discriminating against bondholders and other unsecured creditors in favor of pensioners.
The city’s debt-cutting proposal includes a $660.8 million plan to soften pension cuts and shield the Detroit Institute of Arts collection. Detroit’s legal team counters the “grand bargain” helps Detroit’s most vulnerable creditors and preserves a cultural asset.
“We are not surprised at the vote given the Grand Bargain’s illegal diversion of highly valuable assets to the very creditors who voted yes; we look forward to the confirmation hearing and demonstrating to the court that the plan cannot legally be confirmed given its unfair discrimination against financial creditors and other serious infirmities,” Syncora attorney James Sprayregen said in a statement Tuesday.
The city’s offer is “completely inferior,” FGIC said in a statement Tuesday.
“We understand why the retirees and unions voted in favor of the city’s plan — if we were offered a similar deal, we too would approve the plan,” the statement said. “Unfortunately, the City’s current offer to FGIC and the COPs bondholders in the plan is completely inferior, and until the City treats us fairly, we are compelled to fight for the fair and equitable treatment that is our right under the bankruptcy code.”
Patrick O’Keefe, a Bloomfield Hills corporate restructuring consultant, said the bond insurers aren’t likely to back down before the trial after retirees joined sides with the city in the case.
“They’ve got nothing to lose to keep fighting and appealing … because they’re getting almost nothing, relatively speaking,” O’Keefe said.
At the trial next month, the city may seek to force cuts on creditors that rejected the plan through what’s known in bankruptcy as a “cramdown.”
Detroit City Councilwoman Saunteel Jenkins said she was glad to see support for the plan. “I was very pleased about the results,” she said. “It’s certainly a step in the right direction.”