OPINION: Detroit City Council shot down deal that would have saved millions

Source: Detroit Free PressOct.儲存倉 23--There's no such thing as a good deal when you're bankrupt.That's kind of the point. Whether you're a company, a city, or a regular person, bankruptcy court is where you go when you're out of options. So your choices range from bad, to worse, to what will let you make it through.That's why the deal to settle a disastrous Detroit credit swap from 2005 was necessary -- a $350-million loan from Barclays would have paid off the swaps, given the city access to capital for operational improvements (new computer systems, for example), all at a much lower interest rate, 3.5% compared with the 6.3% Detroit is now paying. Settling the swaps would also free up $11 million a month in casino revenues that are tied up paying the debt.The Detroit City Council voted down the deal and says it's considering an alternate proposal from an unnamed bank. More likely, the state's emergency loan board, stacked with appointees of Gov. Rick Snyder, will approve the Barclays deal.It's not like the city should throw a parade for emergency manager Kevyn Orr, who prioritized getting this deal done and wants to settle it even before the bankruptcy proceedings start.But while there are several key advantages to wiping away the swaps, and to doing so in the way Orr proposes, it's more important that the city just needs the money. In bankruptcy, sometimes you do what you have to because it's the only thing you can do.However, that doesn't mean the deal is risk-free or easy to understand.None of the platoon of lawyers involved in the city's bankruptcy can say with any certainty whether creditors holding the 2005 swaps are secured or unsecured.If they're secured, they would be at the front of the line in bankruptcy court, owed payment in full or close to it. Unsecured creditors are much more vulnerable in a municipal bankruptcy, and can be subject to significant haircuts. For instance, Orr's bankruptcy proposal would pay some unsecured creditors just pennies on the dollar.The deal Orr is backing would settle the swaps at 75 cents to 82 cents on the dollar -- an important markdown for secured creditors (and a win for Detroit), but maybe far more than most unsecured creditors can expect.Here's where the confusion lies. When the swaps were issued in 2005 (a deal that obtained a fixed interest rate on variable rate debt issued to eliminate deficits in the city's two pension systems), they were unsecured. But then in 2009, a drop in the city's credit rating forced a renegotiation of the deal, and Detroit offered up casino revenues as collateral to restructure th迷你倉最平 debt.Tying debt to a specific revenue stream is what some say transformed the swaps from unsecured to secured debt.Orr is planning for the worst-case scenario: If Bankruptcy Judge Steven Rhodes were to declare the swaps unsecured, then sure, Orr would have missed the chance to save a few dimes on the dollar. But any such decision by Rhodes would come after months, if not years, of legal wrangling and the associated fees. In the short term, the city would lose the operating cash it desperately needs and the funding for operational restructuring.Detroit City Council said no to the deal Monday, calling it too risky and too favorable to the banks. We're sure the banks would disagree, and the council's objections seem rooted in a shallow read of the deal.Think of it this way: If you had the opportunity to refinance your mortgage from 6% to 3.5%, gain a line of credit and reclaim a garnishment of some of your wages to pay debt, would you turn it down for the theoretical possibility that there's a better deal lurking?"This is the crowd that is crying for a bailout. This isn't a bailout, but it's a way out," Orr spokesman Bill Nowling said. "It's going to put $240 million on the table over the next year. When has the city had $240 million to spend on anything?"Keep in mind that this deal is the first of its kind for a city, though corporations do them frequently in bankruptcy, and Detroit's investment bankers reached out to 50 institutions and got 30 interested parties to make proposals.Process matters, and here it seems to have worked. We can't fathom the City Council's objections, which are rooted in fear that is unconnected to fact and not the reality of the city's financial situation or the deal.And yet, there is at least one substantive argument to be made about the potential impact of this deal on the bankruptcy proceedings.In most bankruptcies, pensioners are also considered unsecured creditors, but in Michigan, a constitutional amendment endows pensions with special protection. Advocates for retirees are saying they, too, should be secured creditors in bankruptcy court, moving to the front of the line and owed payment in full.We're not sure it's fair to resolve the banks' issue before the retirees'. Orr, obviously, believes it is. And the city can't really do without the cash this deal would bring.But it would be nice to see the needs of the pensioners, easily the most vulnerable creditors, prioritized in the same way.Copyright: ___ (c)2013 the Detroit Free Press Visit the Detroit Free Press at .freep.com Distributed by MCT Information Services迷你倉