Detroit’s coming battle will take place on two main fronts: with bond insurers and with the city’s two pension funds, which Kevyn Orr, Detroit’s emergency city manager, has controversially considered as unsecured creditors.
• The race to file. The Detroit Free Press has fascinating details about Orr’s sprint to the courthouse. At the state’s request, the city’s pension funds delayed by five minutes an emergency court hearing to request a temporary restraining order that would have prevented the city from filing for bankruptcy. In that five-minute window, the city went ahead. The judge says she would have approved the temporary restraining order—had it been submitted before Orr filed.
Orr’s timing could also be tied to a hearing that had been scheduled for Monday by the pension funds seeking to prevent Governor Rick Snyder from signing off on any bankruptcy filing that could reduce pension benefits, saying that would violate the state constitution. To persuade the judge to approve the bankruptcy filing, Orr will have to prove that he negotiated with creditors in good faith. The maneuvers around the timing of the filing could undermine that claim.
• Distressed debts. Hedge funds have started scooping up Detroit bonds that are trading at a discount, according to Muni Market Advisors.
• Watch the insurers. Nearly all of the unsecured bonds are insured by companies including Ambac (AMBC) and Syncora Guarantee. If bondholders are forced to accept less than they’re owed, the insurers will have to make up the difference. One complication is that some bondholders may get better deals than others, which may put insurers in an awkward position. “Orr is playing bond insurers against themselves,” Trident Municipal Research’s Bart Mosley told me back in June.
• How much does the city owe? Orr says Detroit has nearly $20 billion in debt and long-term obligations. Pension funds and bondholders have said in the past he’s inflating the numbers. Why would Orr do that? Because the more dire the city’s finances seem, the more aggressive he can be in pushing for concessions. Also, to be eligible for bankruptcy protection, the city must prove that it’s insolvent, meaning it has no way to pay its