Detroit may sweeten bankruptcy deal with real estate to persuade creditor to settle

Robert Snell, David Shepardson, Chad Livengood and Christine Ferretti
The Detroit News

Detroit – — City attorneys are in private talks this weekend about giving away some of the city’s assets — including possibly the Coleman A. Young Municipal Airport, a stake in the Detroit-Windsor Tunnel and other real estate — to settle with a holdout creditor on the eve of a landmark bankruptcy trial, sources told The Detroit News on Friday.

No assets are off the table in 11th-hour talks with bond insurer Syncora Guarantee Inc. and other parties, except for the Detroit Institute of Arts collection. The collection would be shielded from creditors as part of the city’s plan to shed about $7 billion in debt and emerge from the biggest municipal bankruptcy in U.S. history.

The possibility of a last-minute settlement emerged Friday, 13 months into the city’s bankruptcy case and following increasingly toxic battles between the city’s legal team and Syncora, which could lose about $270 million in the bankruptcy settlement. Syncora has pushed Detroit to liquidate its art collection. But it recently focused on other assets with the bankruptcy trial looming Tuesday and after U.S. Bankruptcy Judge Steven Rhodes criticized the firm’s legal team this week for leveling a personal attack at the judge’s mediators.

“We sense a renewed approach by Syncora to engage in mediation but I can’t talk about details,” Bill Nowling, spokesman for Emergency Manager Kevyn Orr, told The News on Friday.

There is a mutual willingness on the city’s behalf to settle the case before the trial starts, said a source familiar with the closed-door talks.

Syncora and fellow bond insurer Financial Guaranty Insurance Co. — on the hook for more than $1 billion — are two of the biggest obstacles blocking Detroit’s path out of bankruptcy. A deal likely would shorten the trial that will determine whether Detroit’s debt-cutting plan is feasible and fair, and focus on the legality of the “grand bargain,” an $816 million plan to soften pension cuts over 20 years and preserve the DIA art.

Syncora and the city agreed to last-minute private negotiations overseen by Chief U.S. District Judge Gerald Rosen. Both sides, FGIC and other parties met Friday and negotiations are expected to continue through the holiday weekend, sources told The News.

The city is constrained by what assets it could offer, in part, because of commitments in the debt-cutting plan and the fact that it would likely have to offer similar settlements to others in Syncora’s creditor class, a source close to the negotiations said.

Jim McTevia, a Bingham Farms corporate turnaround specialist following Detroit’s bankruptcy case, said it makes sense for the city to unload nonessential assets.

“Giving Syncora assets that aren’t generating revenue or part of the feasibility of the plan in lieu of continued litigation, I would see that as a fairly wise move,” McTevia said.

With most creditors already settled, Detroit has the upper hand, he added.

“Let’s face it, Syncora is in a precarious situation themselves,” McTevia said.

The city’s debt-cutting plan has won widespread and hard-fought support from retiree groups, unions and financial creditors.

But not from Syncora.

Syncora has been the city’s fiercest bankruptcy opponent, challenging everything from Detroit’s access to casino tax revenue and its ability to fix the city’s broken streetlights, pushing for the sale of city-owned art and trying to access retirees’ personal financial information.

One bankruptcy expert said the Bermuda-based bond insurer’s aggressive yearlong court battles may be part of a strategy aimed at securing a settlement from the city.

David Skeel Jr., a bankruptcy law professor at University of Pennsylvania, said the challenges might entice a settlement the city was not willing to offer earlier.

“Syncora does know that Detroit doesn’t want to go into next week with major objecting parties,” Skeel said. “It may be that Syncora is playing that card. It’s been a very intriguing strategy from the beginning.”

Syncora and FGIC claim the city’s debt-cutting plan pays them as little as 6 cents on the dollar for the $1.4 billion in troubled pension debt they insured to help former Mayor Kwame Kilpatrick prop up the city’s pension funds in 2005.

Earlier this month, Syncora attorney James Sprayregen said the company wants to avoid a protracted legal battle. “We’d love to settle this still and our door’s wide open for a settlement,” he told The News. “We think we need to be treated within some range of similarity what the pensioners are recovering.”

Syncora already has a stake in the tunnel linking the United States and Canada.

Ownership of the company that operates the U.S. side of the Detroit-Windsor Tunnel was transferred from an investment company to Syncora in September in exchange for $334 million in swap liability.

American Roads, the parent company of Detroit Windsor Tunnel LLC that operates the Detroit half of the 1-mile tunnel under a lease, makes annual rental payments to the city of about $1 million.

Detroit pursued selling its half of the tunnel for $75 million during Kilpatrick’s tenure but the deal eventually fell apart.

The city of Windsor owns the Canadian side.

Selling the 263-acre airport on the city’s east side would free Detroit from spending millions operating and updating the aging facility and its two runways.

The source briefed on negotiations wouldn’t discuss what specific city assets are being discussed to potentially settle the case but said “everything is on the table.”

Stuart Gold, a Southfield-based bankruptcy attorney who has closely followed Detroit’s case, said he remains “cautiously optimistic” that Syncora and the city will reach an agreement.

“They are engaged in this process to get a solution and to get a settlement,” said Gold, who is representing the Detroit Public Library in the case.

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