Detroit has reached a settlement with its last major holdout creditor in bankruptcy court.
Bond insurer Financial Guaranty Insurance Corporation holds $1.1 billion in Detroit debt. It insured a bad deal on city pension debt whose legality has been questioned.
FGIC had been the city’s last big foe in bankruptcy court. By signing onto the plan of adjustment Detroit has proposed to restructure its debts, it’s removed another hurdle slowing down the city’s exit from bankruptcy.
The deal lets FGIC redevelop the riverfront site where Joe Louis Arena now stands. It’s set to be demolished after the Detroit Red Wings move into a new arena elsewhere in the city.
More on the proposed settlement from WDET’s Sandra Svoboda at Next Chapter Detroit, one of Michigan Radio’s partners in the Detroit Journalism Cooperative:
*A development agreement would mean FGIC or its developer partner would build “mixed-use facility” on the site of Joe Louis Arena after it is torn down in 2017. The development would include at least 300 hotel rooms and office, retail, commercial and residential space. Buildings would not be higher than 30 floors.
*Detroit Emergency Manager Kevyn Orr will ask the city council to approve the deal by early next week. If the council doesn’t approve it, Orr could ask the State Emergency Loan Board for approval.
*The agreement means the city’s litigation challenging the legality of a 2005 pension funding deal is dropped.
*The city will demolish “the Joe” and remediate the site. The state will pay $6 million toward those cots and expenses.
*The state will reimburse the developer up to $4 million in incentives from the Michigan Strategic Fund, in cooperation with the Michigan Economic Development Corp. and $14 million from the Michigan Strategic Fund’s Brownfield Tax Increment Financing Program.
*The city will change the zoning on the site to permit a mixed-use development. The city will approve the site plans.
* To settle FGIC’s debt on the interest rate swap deal for pension funds, FGIC will receive $39.7 million, partially in B notes already in the city’s Plan of Adjustment, partially in money from the Downtown Detroit Development Authority. Another $4.5 million paid to FGIC will come from other funds in the swap claim.
*FGIC will receive about $67.2 million in new C notes. Bond insurer Syncora, in a deal announced last month, received about $23.5 million in those funds. City attorney Corrine Ball said the C note payments represented the relative share of each insurer’s claim in the pension fund insurance: Syncora at about $400 million, FGIC at about $1.1 billion.
*About $19.7 million in “settlement credits,” also offered to Syncora, will be available for FGIC to use as vouchers toward future purchases of city assets. The funds could be used toward 50 percent of any purchase price.
This deal should shorten the remainder of the trial and push Detroit closer to exiting bankruptcy, according to Wayne State University law professor Laura Bartell.
“It just makes it much easier if [FGIC is] on board,” Bartell said.
Bartell suggests it also removes another potential hurdle down the road, should Judge Steven Rhodes approve the plan of adjustment: “FGIC was really the only creditor left with deep enough pockets to pursue an appeal,” she said.
But first, Judge Rhodes needs to approve the settlement itself. So do Mayor Mike Duggan and the Detroit City Council.
Emergency manager Kevyn Orr praised the FGIC deal, saying it “clears a major hurdle the City faced in its attempt to restructure more than $7 billion in debt and free up nearly $1.4 billion to be reinvested in city services.”
For the first time since the Detroit bankruptcy started, Orr really needs the City Council’s approval for a major settlement. Duggan and the Council stripped Orr of most of his powers last month—though it’s never been totally clear if he could overrule elected officials in matters related to the city’s bankruptcy.