Ambac Assurance Corp. turned to Harrison J. Goldin, New York City’s comptroller during its mid-1970s fiscal crisis, for advice on Detroit and its plan to partially repay some debt backed by municipal taxpayers there.
Detroit emergency manager Kevyn Orr halted payments on $2 billion in unsecured debt, including some tax-backed general-obligation bonds, in June. Ambac, a unit of New York-based Ambac Financial Group Inc. (AMBC:US) that insures $170.3 million in the securities, said the move imperils the city’s recovery.
“Michigan is making a grave error in its support for the proposed treatment of the general-obligation bonds,” Goldin said yesterday in a statement from Ambac. “It is short-sighted to signal to lenders that they cannot trust the city’s unconditional pledge to repay its general-obligation debts.”
Orr, appointed this year by Republican Governor Rick Snyder to oversee the fiscal receovery of Michigan’s largest city, has proposed skipping some debt payments, including those owed on $530 million in unsecured unlimited-tax and limited-tax general-obligation bonds. Orr is grappling with $17 billion in Detroit liabilities as he tries to avoid entering what would be a record municipal bankruptcy.
“A successful revitalization of the city will be dependent upon its ability to access cost-effective financing in the future,” Ambac said in the statement. A default by the city “is harmful to Detroit and the interests of taxpayers in Michigan,” the company said.
Ambac also said it would honor investor claims for payment on Detroit bonds if the city fails to cover them, in accordance with its policies. It said it had exposure to $92.7 million in Detroit limited-tax general obligation debt and $77.6 million in unlimited tax bonds.
Goldin, a former state senator, served as New York comptroller from 1974 to 1989, helping to lead the city away from fiscal disaster. He is a senior managing director of New York-based Goldin Associates LLC, a financial advisory firm, and has worked on numerous major bankruptcies, including those of Refco Inc., Enron North America and Drexel Burnham Lambert Inc.
Ambac’s hiring of Goldin may signal another legal battlefront is opening in Detroit’s effort to stave off a request for court protection from creditors.
Ambac is seeking preferential treatment for which there is no legal precedent, said Bill Nowling, an Orr spokesman. He said general-obligation bonds are unsecured debt, and that Ambac, as a bond insurer, should have known the risks of investing in Detroit securities.
“It’s important that the emphasis is not on who wins or loses among creditor classes, but on being able to provide services and fund those services,” Nowling said. Orr’s plan to revive the city’s fiscal affairs treats all creditors the same, Nowling said.
“The city is not a company that can be carved up and sold off,” Nowling said. “It has to function as a city when we’re done with the restructuing process.”
On July 5, Detroit sued to block swaps insurer Syncora Guarantee Inc. from preventing as much as $11 million a month in casino-tax revenue from reaching the city, where it is used to cover basic services. Syncora insures some of the $1.4 billion in securities issued in 2005 and 2006 by the city to cover some pension obligations.
Wayne County Circuit Court Judge Annette Berry granted Orr’s request to keep US Bank, which collected the money from the casinos, from refusing to send the funds to the city. Berry also set a hearing on the matter for July 26.
The New York-based insurer also backs interest-rate swap agreements used by the city to hedge against adverse changes in credit markets that would affect the pension securities, according to a statement by Orr.
Casino revenue was pledged to secure the swaps in 2009, according to Orr. While the city has defaulted on $39.7 million in pension debt service, the payments owed to investors were covered by Syncora. Orr has said that the city hasn’t defaulted on the swap agreements, which are separate.
On June 14, Orr met with more than 100 creditors to outline a financial recovery plan that would use $2 billion in newly borrowed money to cover about $11 billion in debt -- a plan that would offer creditors no more than 10 cents on the dollar, his advisers said.
Orr’s plan includes spending $1.25 billion over 10 years to improve public safety and remove vacant buildings and other blight that he said impedes redevelopment. Detroit, once among America’s 10 biggest cities, has lost a quarter of its population just since 2000 and has been unable to tear down thousands of empty buildings.
About two dozen creditors are set to tour some of the city’s worst areas of blight with Orr tomorrow. The emergency manager plans to explain to them how deep cuts in debt payments are needed to pay for revitalization efforts.
Meanwhile, Orr advisers will meet representatives of the city’s two pension systems to explain proposed cuts in contributions to the funds. Orr has said the pension systems may be underfunded by a combined $3.5 billion, a figure pension fund officials dispute.
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