Kevyn Orr, Detroit’s emergency manager, said he’ll try to persuade the city’s bondholders to reduce a debt of about $8.6 billion.
“Everybody knows we’ve got to address those obligations through negotiations,” he said in a telephone interview today. “And while they are significant, there are ways to do that.”
Orr, a 54-year-old lawyer who specializes in restructuring, was appointed last week to help repair a city in a downward spiral of shrinking population and revenue, and whose municipal government opposed the takeover. Detroit’s deficit hit almost $327 million last year.
The city’s credit outlook was raised to stable from negative by Standard & Poor’s after Republican Governor Rick Snyder named Orr to run it. Its B rating on general-obligation bonds, five steps below investment grade, reflects the financial imbalance, revenue shortfalls and long-term obligations including potential swap-termination payments and unfunded retirement costs, the company said.
Detroit has about $8.6 billion of long-term bond debt, including $6.1 billion of non-general obligation debt, $963.4 million of general-obligation bonds and $1.5 billion of borrowings to fund pension liabilities, according to a report from a financial team that reviewed the city’s finances. When other pension and retiree health-care obligations are included, the city burden totals almost $15 billion.
One of the top methods the city has used to reduce its annual operating deficits since 2005 has been to borrow more money, according to financial team report. The city borrowed some $600 million between 2005 and 2011. The city borrowed another $129.5 million last year through the Michigan Finance Authority to tide it over during its financial crisis.
On top of that, the city owes some $350 million to counterparties on interest-rate swaps, failed bets on the direction of interest rates designed to cut borrowing costs.
Orr, who left a job with Jones Day law firm in Washington, D.C. to take the Detroit position, said the swap situation is “at a standstill,” as counterparties have agreed so far not to demand payment.
Orr said any agreement on debt reduction may involve “a mix” of the city’s bonds.
“I can’t really go in depth on that now because we haven’t entered negotiations with those parties yet,” he said. “We’re going to look at what some of the bondholders and their insurers might want. We are hoping we can get unanimous approval.”
Orr’s appointment had another rating company warning its clients.
“We would generally consider this development to be positive news for bondholders,” wrote Amy Laskey, managing director of U.S. public finance for Fitch, in a March 15 report. “However, Orr has been reported in the press to have made statements indicating he will be looking for savings from current and retired employees as well as bondholders.”
Rick Frimmer, a bankruptcy lawyer with Schiff Hardin LLP in Chicago, who said he represents some Detroit bondholders, said, “It’s early in his tenure. Everyone is waiting to see what this plan will be.”
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