Detroit bankruptcy trial resumes
Detroit — A smaller debt load and additional financial oversight included in Detroit's debt-cutting plan are among the factors increasing confidence in the city among capital lenders, an investment banking consultant said.
Kenneth Buckfire, president of Miller Buckfire & Co., testified Tuesday in Detroit's bankruptcy trial that those components, and "unprecedented" financing the city secured for after the bankruptcy, are increasing confidence in "the new Detroit."
"Lending to a city, lending to Detroit, is unprecedented," he said. "This is the first city that's ever secured post-petition financing for a municipal case."
The assumptions, Buckfire said, include reducing the city's unsecured liabilities from $10 billion to $3 billion, marking an "enormous change" in the city's credit quality.
He also stressed that a new governance mechanism anticipated upon the plan's confirmation "gives creditors confidence there will be effective supervision."
Buckfire spent hours Tuesday detailing Detroit's future credit outlook and expressing newfound confidence that the city will not exceed its debt capacity.
Buckfire did, however, warn Tuesday that uncertainty over tax revenues in Detroit poses a "fundamental risk" to its financial outlook.
"Tax revenue stability will be most crucial element of the (city's) credit story," he said. "If you are not generating cash, you cannot pay back your debt."
Buckfire's firm has been engaged with Detroit since 2012, when it was brought on to evaluate debt capacity for the city and its ability to raise capital.
The next year, he said, they were hired to address the city's "pressing liquidity concerns" and "recommend a strategy to put the city on solid footing."
The city's plan outlines strategies to stabilize revenue and decreased liabilities, has a stronger balance sheet and calls for reinvestment.
Buckfire also noted that the city's treatment in its plan of retiree pensions and health care liabilities was "crucial."
"It eliminated risk that contribution costs would have to be dealt with in annual budgets and have an impact on city's ability to reinvest and fix its debt service obligations," he said.
The city's recently secured $375 million in exit financing from Barclays, he added, proves to the market that a borrower isn't likely to go back into bankruptcy.
Under the deal, Detroit will pay off a $120 million loan from Barclays that financed "quality of life" improvements to city services. It also will allow Detroit to pay $45 million toward a settlement of a troubled pension-related debt with two banks, and potentially $55 million toward limited-tax general obligation bondholders, officials have said.
But if the plan is not accepted, he warned, the city would have the obligation to repay a settlement tied to a troubled pension debt and the post-petition financing.
"That would put a considerable strain on liquidity," he said.
The city's bankruptcy trial resumed Tuesday amid renewed negotiations between Detroit and its last major holdout creditor to reach a settlement that would largely eliminate opposition to a $7 billion debt-cutting plan.
Emergency Manager Kevyn Orr is expected to follow Buckfire.