Detroit Reaches Bankruptcy Deal With Some Bondholders

By Eyder Peralta

Published April 9, 2014 at 1:40 PM EDT

The city of Detroit has reached a deal with some bondholders that allows them to keep 74 percent of the $388 million they are owed, the city announced Wednesday.

As the Detroit Free Press explains it, these unlimited-tax general obligation bondholders are the ones with the strongest legal position in this matter, so this is important because it resolves one of the thorniest issues in the city's record bankruptcy.

The paper reports:

"The bond insurers that back the debt have agreed to allow the city to divert 26% of the taxes they're owed back to a new fund designed to alleviate the impact of the bankruptcy on Detroit's 'most vulnerable' retirees, Detroit bankruptcy mediator U.S. District Chief Judge Gerald Rosen said in a statement.

"The settlement reflects a dramatically better deal for the bondholders than Detroit emergency manager Kevyn Orr offered last week. The city had offered 15 cents on the dollar — down from 20 cents on the dollar in February — but the settlement acknowledges that the unlimited-tax bondholders had a strong legal argument."

Bloomberg reports that the 26 percent in taxes diverted will amount to about $100 million. Bloomberg adds:

"Under a plan submitted to the court in February and revised last month, pensions for police and firefighters would be cut about 6 percent if they vote for the plan, 14 percent if they don't. Pensions for other city workers would be cut by about 26 percent if they vote yes and by about one-third if they don't.

"About 20 percent of current pensioners would be pushed below the poverty line by the plan, according to a committee of retirees that has been negotiating with the city."

The city says the $100 million insures "that the most vulnerable retirees remain above the federal poverty line."

Reporting on the potential deal, yesterday, the Detroit Free Press said this deal is important because by proving that these bond holders are willing to take less money than they are owed, it "could make it easier for the city to force other unsecured creditors — including pensioners — to accept cuts."