Creditor becomes stakeholder in Detroit's future
Detroit— An economic development deal reached on the sidelines of the city's bankruptcy case Thursday could transform the Detroit riverfront.
The breakthrough deal with the largest remaining creditor, bond insurer Financial Guaranty Insurance Co., moved the city a step closer to the end of the biggest municipal bankruptcy in U.S. history.
The firm was fighting Detroit's plan to pay about 6 cents on the dollar for $1.1 billion in claims stemming from a controversial $1.4 billion pension deal backed by former Mayor Kwame Kilpatrick and blamed for pushing Detroit into bankruptcy.
There are several obstacles in the city's path out of bankruptcy court, including individual retirees fighting Detroit's plan to shed $7 billion in debt and a ruling from U.S. Bankruptcy Judge Steven Rhodes about whether the plan is feasible and in the best interest of creditors. He is expected to rule on the plan before Thanksgiving and Detroit could possibly start investing $1.7 billion in city services the next day.
Thursday's deal, struck at 2:30 a.m., turns Detroit's biggest adversary into a partner in the city's revitalization under a deal that will transform the riverfront and the Joe Louis Arena site into a 300-room, 30-story hotel with condominiums and retail shops. FGIC and a group of seven bondholders also will get $141 million in new notes.
"This will be hopefully another turning moment for this area," Detroit bankruptcy attorney Corinne Ball said.
The FGIC settlement means almost all of the city's creditors — including retirees, pension funds, banks and bondholders — have cut deals that spare the Detroit Institute of Arts collection from being liquidated and sold to pay claims.
The main pillar of Detroit's bankruptcy plan is the "grand bargain." The $661 million agreement includes money from the state, the DIA and charitable foundations to soften retiree pension cuts and shield the DIA collection from creditors.
Closing arguments set
The bankruptcy trial will resume with hearings Friday and Monday, and includes testimony from an expert who concluded Detroit's plan to dump more than $7 billion in debt and upgrade city services is feasible. Rhodes says he anticipates closing arguments next week.
"Assuming that Judge Rhodes finds the plan terms to be achievable, the city can return to normalcy much more quickly, and without the cloud of appeals looming in the background," Bloomfield Hills bankruptcy lawyer Douglas Bernstein said.
Business reorganization and creditors' rights attorney Michael L. Cook, a partner at New York-based Schulte Roth & Zabel who has monitored developments in city's historic bankruptcy trial, said the city's case has been "complicated" and "unique."
He expects few changes in the city's bankruptcy plan once it incorporates the FGIC deal.
"It's been vetted and gone through so many objections," he said. "(Rhodes) might make some tweaks, but I doubt very much anything material."
Mayor Mike Duggan said members of his team participated in the mediation, along with Emergency Manager Kevyn Orr and representatives from the governor's office.
"It's a fair settlement and a fair resolution and I fully support it," Duggan told The Detroit News on Thursday.
Duggan says FGIC's commitment through the proposed deal to redevelop city property is a "positive result."
"It takes somebody who was a creditor, who was angry and turns them into a partner in Detroit's future," he said.
The FGIC deal needs to be approved by the City Council and Orr, because it involves real estate. "I would hope I could appeal to their good graces and perhaps have them approve it next week," he said.
Council President Pro Tem George Cushingberry Jr. said he supports the FGIC deal, in concept. "It shortens the time to (the) closure of the case," he said.
Cook said the latest agreement would likely expedite the confirmation process.
"Once there's an agreement in principle with major players the confirmation express is now on the tracks," he said, adding it's likely everyone involved wants to get the plan confirmed.
"Especially the judge who is going to be driving the train here," he added.
The judge delayed his retirement by a year to hear the Detroit bankruptcy case. His retirement party is Dec. 11 at the Roostertail restaurant, a short boat ride east of the Joe Louis Arena site.
The city also announced a separate deal Thursday with the Macomb Interceptor Drainage District, a group that was fighting the city's debt-cutting plan. The group settled for a $22 million claim, said the city's bankruptcy lawyer, Heather Lennox.
State to help demolish arena
Joe Louis Arena, the longtime home of the Detroit Red Wings, is scheduled to be demolished in 2017 after the hockey team relocates to a new arena in the Cass Corridor area. Under terms of the deal, the hotel to be built on the site must be at least 300 rooms and no more than 30 stories tall.
"FGIC is happy to be in this position," the bond insurer's attorney Alfredo Perez said. "I anticipate going forward it'll be a mutually beneficial relationship."
The state will help demolish the arena, which could cost $6 million.
The hotel would be built by 2022, according to a timeline shown in court Thursday. Perez said his client had not identified a development partner for the site.
FGIC and a group of seven investors who are owed $1 billion would split $141 million in new notes as part of the bankruptcy settlement. Ball, the city's lead bankruptcy lawyer, said the bondholders had agreed to the deal.
But a lawyer for the investors, Thomas Moers Mayer, said his group was not ready to withdraw its objections. He said he needed a few days to review the settlement documents.
The FGIC deal is consistent with deals reached by similar creditors, the bond insurer's chief executive officer, Timothy Travers, said.
Fellow bond insurer Syncora Guarantee Inc. struck an earlier deal that involves cash, real estate, an extension of the Detroit-Windsor Tunnel lease and a lease for a parking garage underneath Grand Circus Park.
Syncora and FGIC each will receive about 14 cents on the dollar, Orr spokesman Bill Nowling said. The Syncora deal helped FGIC reach a deal in one respect, he said.
"FGIC became the last holdout and the clock was running out," he said. "Time is a factor and it wasn't a factor in their favor."