Bankruptcy: Bad News for Bond Insurers

Bankruptcy: Bad News for Bond Insurers

With demands to sell the Detroit Institute of Arts collection, hundreds of pages of legal arguments and a few successes at the negotiating table, The Detroit News reports five financial firms are “fighting for their survival” in the Detroit bankruptcy case.

The reason is simple: These insurers will be left holding the bag for nearly every dollar cut from payments on the city bonds, a tab that could run to more than $2 billion. And after taking massive losses during the great recession, a big hit in Detroit’s bankruptcy could push at least one bond insurer to close its doors, notes Matt Fabian, managing director of bond analysts Municipal Market Advisors.

One of those firms is Syncora Guarantee, a branch of the Bermuda-based Syncora Holdings Ltd., which insured the pension “interest rate swaps,” a deal settled for $200 million under its value.

Syncora also is the creditor who subpoenaed massive amount of information from the Detroit Institute of Arts, Christie’s and the Michigan Attorney General as part of the Detroit bankruptcy case. Last week, the AG’s office provided documents, revealing officials there and at the DIA had been communicating about the issue of the artwork as collateral for creditors weeks before the bankruptcy was filed.

Another of the bond insurers profiled in The News today is Financial Guaranty also known as FGIC. The company insured $1.1 billion of the certificates of participation in the 2005 and 2006 pension funding arrangement. Emergency Manager Kevyn Orr  has authorized a lawsuit seeking to void that deal. The News writes:

FGIC filed a 1,027-page lawsuit disputing the city’s lawsuit that attempts to repudiate the COPs deal. FGIC accuses the city of turning “a crooked eye to history, revising the facts of the pension funding transactions and claiming that the city was the innocent victim of fraud perpetrated on a grand scale.”

FGIC has filed court papers, urging the court to do “due diligence” in assessing the value of the DIA collection.

Two other bond insurers, National Public Finance Guarantee Corp. and Assured Guaranty Municipal Corp., are negotiating a deal over the city’s water and sewer bonds. The News reports “Assured covers $1.6 trillion in those bonds, while National insures $1.8 billion, plus another $621 million with Berkshire Hathaway.”

A fifth insurer, Ambac, “remains on the hook for the city’s limited-tax general obligation bonds, and was ordered to mediation on April 22.”

In the last bankruptcy proposal, the city planned to settle at 10 percent to 13 percent of the $164 million in bonds, which would hand Ambac a loss of $82 million to $85 million. Ambac has strenuously objected.

Ambac, along with Assured and National Public Finance Guarantee Corp., earlier reached a deal with the city reducing the trio’s $388 million claim to $287.5 million on general obligation bonds.