Detroit settled with one of its last major creditors, bond insurer Financial Guaranty Insurance Co., bringing the city closer to ending the biggest-ever U.S. municipal bankruptcy.
The remaining holdout creditors, led by hedge fund managers including Aurelius Capital Management, will decide in the next few days whether to sign onto the deal, their lawyer told U.S. Bankruptcy Judge Steven Rhodes Thursday. The creditors, who hold more than $1 billion in pension-related debt, pulled out last night when they learned of a last-minute change in the proposal, attorney Thomas Moers Mayer said.
Mr. Rhodes still must decide whether the city’s debt-adjustment plan is workable and fair. The FGIC settlement strengthens arguments that it’s equitable, said Doug Bernstein, a lawyer at Plunkett Cooney PC in Bloomfield Hills, Michigan, who represents two charitable foundations involved in the case.
“It really should mean the plan gets confirmed if the judge finds the plan to be feasible in all other elements under the bankruptcy code,” Bernstein said. “You’ve got a vast majority of the creditors voting in favor of the plan. That satisfies the elements that it be fair and equitable and in the best interest of the creditors.”
The deal still needs at least three approvals before it could be final. New York state regulators that oversee FGIC must sign off, as must the Detroit City Council or, if the council rejects it, a Michigan loan board that helps oversee Detroit’s finances. Mr. Rhodes has the final say on the settlement and the overall plan, which would shed about $7 billion in debt.
Detroit already reached settlements with other creditors, including public pension systems, under court-supervised mediation in the past year.
Mr. Rhodes scheduled a hearing for next week, saying he still plans to take testimony from a court-appointed expert hired to examine the city’s proposal.
At the center of the plan is an agreement with the state of Michigan and large philanthropies to protect Detroit’s art collection in exchange for hundreds of millions of dollars to shore up public pension funds. Some opponents said the art should be sold or used to secure loans to repay creditors.
FGIC had claimed Detroit owed it more than $1 billion because it insured pension-related debt that the city had proposed to pay at 10 cents or less on the dollar. The bond insurer also said the plan was improper because it treated different creditors unequally.
FGIC would drop those and all of its other objections to the plan under the deal.
FGIC is also settling claims on behalf of the hedge fund investors owed about $1 billion, Connie Ball, a lawyer for the city, told Mr. Rhodes. Those bondholders include funds managed by Aurelius and BlueMountain Capital Management LLC. As the debt insurer, FGIC has the power to settle part, but not all, of the investors’ claims.