Day 22: Detroit’s Bankruptcy Trial

Day 22: Detroit’s Bankruptcy Trial

Today’s testimony includes witnesses who will shed light on the city’s settlement deal with Financial Guaranty Insurance Co., which includes a development agreement for the Joe Louis Arena site, as well as other settlements.

12:50 p.m.

Court is done for the day. The bankruptcy trial resumes tomorrow with testimony from the court-appointed expert witness. Her initial report can be found here. She’ll discuss the feasibility of the plan’s financial and administrative assumptions.

12:48 p.m.

Judge Steven Rhodes as Emergency Manager Kevyn Orr the value of the development agreement that’s part of the city’s settlement with FGIC.

Orr first said he wasn’t sure he could answer without violating the confidentiality requirements related to the case’s mediations.

“Ultimately I’d like you to testify either what the value of the real estate is FGIC has an option to acquire here or tell me the city doesn’t think it’s necessary for the court to have that to determine the reasonableness of the settlement. If your answer is that, then we have to have a discussion about why that would be,” Rhodes said.

The court took a break for Orr to consult with the city’s attorneys.

When his testimony resumed, he said, “The Development Agreement is related to the invalidity litigation (for the Certificates of Participation pension financing), and right now that property has no current value or even negotiated value because it has to be demolished and remediated before it can be developed,” Orr said.

Judge Rhodes replied, “Just to translate that into slightly different language, the city’s position is that the costs associated with attempting to market all of that property either equals or exceeds what the city could sell it for in the market?”

“Yes,” Orr said, “Because you have to demolish it. You have to remediate it, so that’s true, your Honor,” Orr said.

12:23 p.m.

As part of the bankruptcy financial restructuring, the city of Detroit is contracting with Hilco Industrial company to sell some city vehicles and equipment.

In his testimony this morning, Detroit Emergency Manager Kevyn Orr said the list includes buses, trailers, pick up trucks, cargo vans, floor scrubbers, sweepers, a dump truck, a crane, a backhoe, a surface grader and other items from several city department.

He did not testify about how the sale would proceed.

12:03 p.m.

Orr said the deal the city reached with bond insurer FGIC is a “global settlement,” in part because it resolves litigation involving the pension Certificates of Participation and avoids future litigation.

“We are resolving some fairly heated litigation with FGIC over some large sums of money,” Orr said.

Provisions in the settlement prevent litigation between FGIC and other parties, including the pension systems, involved in the deals.

“We’re trying to provide finality in all of our agreements and transactions if we want ot be a good development partner with FGIC. We do not want any third parties to be embroiled in litigation,” Orr said. “Rather than buying more litigation going forward, we’re trying to bring and end to all of that potential at this point and go forward, focusing more on the upside, the sustainable and economic development of the agreement going forward.”

11:32 a.m.

Orr now is testifying about FGIC’s involvement with the city’s Certificates of Participation pension financing. FGIC insured about $1.1 billion worth of the deal. In a January lawsuit, Orr challenged the legality of the deal, which allowed the city to borrow money for pension financing above the legal debt threshold.

Under questioning from city attorney, Greg Shumaker, of Jones Day, Orr said the bankruptcy settlement with FGIC means the city will drop its suit, saving the city substantial legal fees. “This was going to take at least several years,” Orr said. “I anticipated that it was going to be complex, both factually and legally, under some of the theories for several reasons. One, it was pretty clear that both parties were going to be killing a lot of trees in terms of throwing a lot of paper back at each other. I’m familiar with the counsel representing FGIC. … They’re quite capable. They will represent their client zealously within the bounds of the law.”

If FGIC had prevailed in the suit, Orr said, the bond insurer could have had a claim to pension funding.

“It would have been fairly catastrophic,” if FGIC had won the case, Orr said.

11:20 a.m.

Detroit Emergency Manager Kevyn Orr is back on the witness stand, describing how the FGIC settlement came about following mediation discussions. “They began in earnest a week or so after the Syncora settlement and picked up speed the last three weeks or so,” Orr said. The federal mediators, including Chief U.S. District Judge Gerald Rosen, were involved, as well as Mayor Mike Duggan.

“I made a pledge, which I wanted to keep, with the mayor to work with him and his team to go through an effective transition,” Orr said. “I felt I no longer had the authority under the statute to deal with city property, but I felt as a matter of prudence, it was important to have the mayor’s team involved.”

Gov. Rick Snyder’s controversial staff member, Richard Baird, also was at the table, Orr said, because the city did not have much left to offer the bond insurer in a settlement on their $1.1 billion claim.

“It became clear that something of that value as going to have to be in-kind as opposed to debt or cash, and we were going to need the state to provide certain kinds of programs,” Orr said.

10:57 a.m.

Also new in the city’s restructuring plan, Malhotra testified that the city could reap $5 million next year from selling 13.5 million pounds of copper wire — $25 million over six years — as the public lighting department is decommissioned. “It’s the wire that exists both overhead and underground,” Malhotra said.

10:45 a.m.

Judge Rhodes asked Malhotra about the $55 million he’s being asked to approve in exit financing, as part of the city’s Plan of Adjustment, and whether the city would actually pay that when it emerges from Chapter 9.

“Based on all the discussion I’ve had with the CFO of the city (John Hill), the $55 million is being paid off (to Limited Tax General Obligation Bond holders) at the exit,” Malhotra said.

Judge Rhodes then asked, “Do you have an opinion about whether that payment of $55 million instead of bonds is in the city’s better interest?”

Malhotra said paying it off over time, through bonds, would cost the city more because of interest that would be attached to that. “In my view at least, the city has the capacity under its proposed exit financing to pay off the $55 million,” he said.

“It’s debt versus debt.”

10:39 a.m.

During his testimony, financial consultant Gaurav Malhotra reviewed the city’s Plan of Adjustment’s $632 million in new “B Notes” to be issued to creditors. Here’s the distribution of those settlements:

$493 million to Other Post-Employment Benefits for Retirees (health care, for example) -

$74 million to FGIC – 12 percent of total

$23.5 million to Syncora – 4 percent of total

$17.3 million to Limited Tax General Obligation Bondholders – 3 percent of total

$3.7 million to Downtown Development Authority – 1 percent of total

$21 million to other unsecured creditors – 3 percent of total

The B Notes will be held by OPEB, the COPs holders and other unsecured creditors. Interest will be 4 percent for first two decades, growing to 6 percent for the last decade. They are interest-only for the first 10 years.

10:28 a.m.

Gaurav Malhotra, a consultant with Ernst & Young, is reviewing some of the terms of the FGIC settlement. He says the New York-based bond insurer’s recovery is 13 percent, including $141 million in new notes and $20 million in “settlement credits.”

10:15 a.m.

With additional settlements reached with the city’s creditors, Gaurav Malhotra is on the witness stand. Again. (He appeared at Day 12 of the trial.) Malhotra is principal and senior managing director in the restructuring practice at Ernst & Young in Chicago.  His initial role when he began working with Detroit three years ago was to assess the city’s short-term cash flow situation. In Spring 2013, Ernst & Young’s role changed to look at longer-term financial projections for the city.

9:59 a.m.

After today’s first witnesses finished testifying, Judge Steven Rhodes addressed city attorney Bruce Bennett, of the Jones Day law firm, who will be making the closing argument next week.

Here’s what Rhodes told Bennett he wants to hear at that time:

“I asked parties, counsel, to brief the meaning and operation of Section 943 (b) 3 of the Bankruptcy Code. This is the section that deals with the reasonableness of fees and how this works in this context. So I want you to be fully prepared to discuss that section with me and how it can work here.

“I need to know specifically which settlements the city is asking the court to approve and whether approval of exit financing is part of the city’s request at that stage also, and I’d like you to spend as much time as you think is necessary on the issue of the justification for the discrimination among the classes of unsecured creditors.

“At the same time, however, while you do that, I want to indicate to you that I’m less concerned about the numerator and denominator than I am about the business side, the business justification side of that analysis.

“If anything further occurs to me in the meantime, I’ll try to let you know.

9:53 a.m.

Parking consultant Gerald Salzman testified about various models of ownership for the city’s parking “assets” — garages and metered spaces. A few highlights:

*Four models were considered, some of which included privatization.

*An additional 370 meters are possible.

*Revenues will decline after 2018 when the Joe Louis Arena garage is transferred to bond insurer FGIC or its developer.

9:45 a.m.

Here are the seven city-owned parking garages, their addresses and their capacity:

Ford Underground, 30 E. Jefferson, 723 spaces

Grand Circus, 1600-1601 Woodward Ave., 821 spaces

Joe Louis Arena, 900 W. Jefferson Ave., 3,200 spaces

Millenium, 432 W. Congress St., 595 spaces

Premier Underground, 1206-1208 Woodward Ave., 895 spaces

Eastern Market, 2727 Riopelle St., 300 spaces

Cultural Center, 41 Farnsworth St., 350 spaces.

9:37 a.m.

Meanwhile, The Detroit News’s Robert Snell is reporting one more financial group is close to a deal. The COPs holders are the parties that own the Certificates of Participation issued in the now-infamous pension debt financing deal.

Here’s his story.

9:25 a.m.

The first witness is Gerald Salzman, who works for Desman Associates, a parking and transportation consulting company that examined Detroit’s garages.

A team of 10 engineers did a conditional assessment in the city’s parking garages, examining the concrete’s condition, structural integrity and other features, Salzman said. On the financial side, Desman developed a financial model based on data from the city and their own verification based on inventory, occupancy counts of cars in the garages