Detroit Bankruptcy Plan Favors Pensioners Over Bondholders
By Chris Christoff and Brian Chappatta Jan 31, 2014
Detroit’s pensions would get more than twice what creditors who loaned the city money for those funds would receive under a proposal to restructure its $18 billion of debt.
The draft plan given to creditors this week by Emergency Manager Kevyn Orr offers different recovery rates for classes of unsecured creditors. Pension funds would get 45 to 50 cents on the dollar, though retiree health-care liabilities would recoup just 13 cents, according to the plan.
The record municipal bankruptcy may set precedents in how retirees and bondholders are prioritized when a locality falls into distress. Investors in the $3.7 trillion municipal-debt market have assumed that states and cities would raise taxes as high as necessary to make full payments on general obligations.
Orr’s plan, reported earlier by the Wall Street Journal, makes clear that unsecured creditors, with $9.2 billion in claims, would be treated differently in the bankruptcy, which came after the one-time industrial giant was unable to pay bills or provide adequate services. The proposal was given this week to creditors for feedback, as Orr prepares to submit a restructuring plan to federal bankruptcy court.
“If you’re a bondholder in the state of Michigan, every pledge should be viewed as a subordinate pledge going forward,” said Adam Mackey, head of munis at PNC Capital Advisors LLC in Philadelphia. “Ultimately you’re going to see Michigan debt be penalized.”
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http://www.bloomberg.com/news/2014-01-31/detroit-bankruptcy-exit-plan-favors-pensioners-over-bondholders.html
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