Feb. 21 (Bloomberg) — Detroit filed a proposal to reduce its $18 billion debt load and exit court supervision, starting what may be the most contentious phase of the biggest-ever U.S. municipal bankruptcy as general-obligation bondholders face a recovery of 20 percent.
The city's debt-adjustment plan was filed today in U.S. Bankruptcy Court in Detroit. In addition to proposed cuts to the bonds, the city would also pay retired police and firefighters 90 percent of their pensions, while general public employees would get two-thirds of theirs.
City unions have challenged Detroit's right to use bankruptcy to cut pensions, while investors and insurers have sought to reserve tax revenue to back general-obligation bonds. The city has also been trying to cancel interest-rate swaps that cost taxpayers $4 million a month.
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Detroit filed for bankruptcy on July 18 after decades of decline, saying it couldn't pay creditors while also providing basic services. The city's emergency financial manager, Kevyn Orr, set an aggressive timetable for the case, seeking to finish by September 2014, when he can be removed from his post by the City Council.
Auto Center
Once the center of the U.S. auto industry, Detroit has seen factory jobs dwindle in recent decades. During the financial crisis, General Motors Co. and Chrysler Group LLC went through bankruptcies of their own. Both companies have since reorganized and are thriving again, while the city continues to cope with broken streetlights, blighted neighborhoods and overstretched emergency services.
The debt-adjustment plan is the result of months of court- supervised mediation between the city and its creditors. U.S. Bankruptcy Judge Steven Rhodes must decide whether the proposal contains enough information for creditors to vote on it. In court on Feb. 19, Rhodes said he expected the city to keep talking to creditors even after a plan was filed.
"Mediation won't be over until every last single issue has been settled or decided by me," Rhodes said. "Maybe even it will continue until the case is on appeal."
At a hearing this week, he encouraged the city to reach an agreement over what priority to assign some bond debt. If the judge is forced to rule on the matter, he may choose to lump the bondholders in with other unsecured creditors, such as pension funds and suppliers, a precedent that could make it costlier for other municipalities to raise money.
Tight Deadline
Orr and Michigan Governor Rick Snyder, the Republican who appointed him, both said after July's bankruptcy filing that a September deadline would be hard to meet. Should they succeed, Detroit, whose case involves more than twice the debt of all four of the largest municipal bankruptcies since 2008 combined, would also be the fastest through the process.
After a vote, creditors can raise further objections at a confirmation hearing. Rhodes will take the votes and the objections into account before deciding whether to confirm the plan. Bankruptcy law permits him to override a "no" vote through a process known as a cram-down.
The city of Vallejo, California, needed more than three years to win court approval of its debt-adjustment plan and end the active part of its bankruptcy. Jefferson County, Alabama, took more than two years to complete its $4 billion case, while the California cities of Stockton and San Bernardino have been under court supervision since mid-2012.
San Bernardino hasn't yet filed its debt-adjustment plan, while the earliest Stockton could win approval of its plan is May, according to court records.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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