Day 13: Detroit’s Bankruptcy Trial

Day 13: Detroit’s Bankruptcy Trial

Detroit Emergency Manager Kevyn Orr could take the stand today. But there are two witnesses ahead of him, according to city attorneys. First is Vyto Kaunelis, a consultant with OHM Advisors, an environmental, architecture and planning firm. He’s likely followed by Ken Buckfire, of the Miller Buckfire banking restructuring firm.

Here’s an interview the Detroit Free Press did with Buckfire last year.

5:04 p.m.

After city and creditor attorneys finished questioning Buckfire, Judge Steven Rhodes had a few questions. As he is being asked to approve an additional $50 million in exit financing for the city, Rhodes had a few questions related to Buckfire’s opinion about what the borrowing costs could be on that loan.

Buckfire said the city could expect a spread of 25 to 50 basis points between asking for a secured versus and unsecured loan – a similar range to what he predicted would happen in the corporate market.

Fifty basis points, Buckfire said, would be “not an immaterial amount,” and he estimated that would equate to about $1.1 million a year for a decade in savings to the city.

In addition Buckfire offered a few nice soundbites as he answered the judge’s questions:

* “Some cities may have a higher credit rating but have not dealt with their unfunded pensions and OPEB (other post-employment benefits) liabilities like Detroit has done.”

* “The new Detroit story has not yet been vetted by experience.”

4:42 p.m.

On re-direct, city attorney Thomas Cullen, of Jones Day, followed up on FGIC attorney Ed Soto’s question pointing out that Buckfire did not do an analysis of what would happen if the city’s bankruptcy case was dismissed. Cullen asked WHY Buckfire did not do such a review.

“The condition of the city prior to the bankruptcy I thought addressed it very well. In the case it was dismissed we’d be back to where we were before,” Buckfire said.

In short: $18 billion in long-term debt on roughly $1 billion annual revenues with roughly 40 percent — and growing — of the city’s annual budget servicing debt. Plus, Buckfire said, the city would have to pay for the pension funding “swamp settlement” and its post-petition financing, amounts that were not included in the bankruptcy petition and totally hundreds of millions of dollars.

4:30 p.m.

After city attorney Thomas Cullen, of Jones Day, finished questioning Buckfire and walking him through explanations of the city’s post-petition financing, exit financing and position in markets, creditors’ attorneys had time to cross examine him. First Ed Soto, attorney for bond insurer FGIC,  asked about a range of topics including whether Buckfire included the Detroit Institute of Arts assets in his analysis (he didn’t) and what ranges of recovery creditors could expect.

Then came Debra O’Gorman, a New York-based attorney representing the Macomb County Public Works Commissioner, Anthony Marrocco, who continues to object to the city’s Plan of Adjustment because of a $26 million claim regarding the Macomb Interceptor Drain. Here’s some background on that issue. O’Gorman questioned Buckfire about the Syncora settlement, the Downtown Development Authority and the exit financing.

2:35 p.m.

A buzzing noise has caused a recess in the trial until 3:30 p.m.

1:47 p.m.

Buckfire is back on the stand for the beginning of the afternoon court proceedings. An attorney for bond insurer Financial Guaranty Insurance Company (FGIC), Ed Soto, is questioning him about whether he considered the city-owned portion of the Detroit Institute of Arts collection when he valued the city’s assets.

FGIC’s claim in the city’s case is about $1.1 billion through the pension Certificates of Participation. Following testimony yesterday about what possible settlement exists for the company, both of Detroit’s daily newspapers today published articles about the status of such a deal. Here is the Detroit Free Press story. Here is the article in The Detroit News.

11:05 a.m.

In Buckfire’s first roughly 80 minutes on the stand, he said:

* Maintaining and increasing tax revenues is a “crucial” issue for the city. “The ability of the city to maintain tax revenue stability is going to be, ultimately, the most crucial element of the revenue story,” Buckfire said.

* Detroit was the first debtor in a municipal bankruptcy to seek post-petition financing, and it was “four times oversubscribed.” “The market, I believe is reaccepting Detroit’s credit which means the question about (interest) rates is not longer a question about viability in the city. If that was still an issue, you’d be paying very high rates,” Buckfire said.

* The city’s post-petition financing was “at the lowest possible price,” and there was great market interest. “They had four times as much demand for these loans as they needed to sell it. … Most of the buyers were not what I would characterize as normal participants in municipal finance markets. They were not hedge funds. Thy were not people coming in here looking to make a fast 10 points.”

* “The annual cost of servicing those obligations over the next 10 years will have a high level of certainty,” Buckfire said. “That’s an important factor for the credit markets. … A lender to the city post-bankruptcy will have a very high level of confidence because there’s no refinancing requirement during the first 10 years.”

* The success of exit financing including “proving to the market that in fact the borrower is not likely to go back into bankruptcy. That’s always the core requirement of a new lender to a situation, and we have to prove that adequately in order to raise capital at the lowest cost,” Buckfire said.

* Reducing the city’s obligations to pay pension and retiree health care costs (also known as Other Post-Employment Benefits or OPEB) was a key element to attracting loan backers. “It was crucial because it eliminated the risk that those contribution costs would have to be dealt with in the annual budgets,” Buckfire said.

* The reduction from $10.4 billion to $3.1 billion of unsecured debt has also attracted market interest. “We have fixed the cost of serving those liabilities for 10 years with a high level of certainty,” Buckfire said. “I would actually argue that the credit of Detroit will be higher than the credit of most other major cities which have not deal with their unfunded OPEB liabilities.”

10:01 a.m.

Here is Buckfire’s first Expert Report.

Buckfire testified he supplemented his first report, filed in July, with the Detroit Water and Sewerage Department bond tenders and the $325 million exit financing (up from the original $275 million deal because it includes a $50 million payoff of  limited-tax general obligation bond obligations). “That was not in evidence at my original report date. Those are the two most important things,” Buckfire said.

According to the report Miller Buckfire is paid $300,000 monthly by Detroit and “will receive a $28 million restructuring fee, less a credit for certain amounts previously paid to Miller Buckfire, upon a recapitalization or restructuring of the City’s debt securities and/or other indebtedness, obligations or liabilities, including a plan of adjustment.”

9:37 a.m.

Buckfire’s New York-based firm first contracted with Detroit during Summer 2012 when it did a 60-day evaluation of the city’s financial condition. “That was designed to provide to the state and to the city leaders an independent assessment,” Buckfire said.

In January 2013, Miller Buckfire started to analyze and advise the city about its “overwhelming financial problems,” Buckfire said. Fifteen bankers were part of the team.

“The city needed to reinvest in appropriate activities,” Buckfire said. The priorities? Stabilizing the tax base and attracting new residents and businesses.

Miller Buckfire helped to analyze the city’s debt capacity in part, to understand what Detroit would need to spend to “restore its solvency,” Buckfire said. “I’m very optimistic from a debt capacity point of view that we have maximized what the city can borrow.”


  • Steve Banicki

    Detroit is never going to recover unless the Grand Bargain is adjusted so the city is not giving away $10 billion in assets for 5 cents on the dollar. It must also fix the schools or the middle class will never grow…