In his first report as Detroit’s Emergency Manager, Kevyn Orr outlined the city’s problems. To those familiar with the situation, there were no surprises about the top level interrelated problems facing  Detroit: urban sprawl/blight, soaring and unsustainable union contracts and pension liabilities, a history of municipal “borrowing from Peter to pay Paul,” archaic infrastructure, and systemic municipal inefficiencies. The result is a current negative cash position of $162 million and the blunt assertion that debt payment on current obligations will not be made in order to prevent the city from running out of cash. Moreover, Detroit has in all likelihood lost its access to capital in the marketplace given its current credit ratings, the amount of outstanding debt, and its stated inability to repay the obligations. As a result, the solution must be a comprehensive overhaul of the current municipal system. 

Addressing problems of this magnitude will require widespread, comprehensive...

With Stockton now squarely within the parameters of Chapter 9 and Detroit continually troubled but hoping to avoid Chapter 9, are there any synergies or similarities between the two to serve as a warning for bondholders who will likely end up bearing some (and possibly all) of the losses in the restructuring of these municipalities?  Perhaps. 

There are certainly factors to examine in determining if and when a municipality will be able (or unable) to meet its obligations.

In Detroit, one of the key indicators that the city was in trouble was the number of people who have left the city and the socio-economic status of those who remain, which in many instances are simply the ones who can’t afford to leave. This translated into a decreasing tax base at a time when the same amount (or more) of municipal services (police, fire, etc) were still needed because the geographic area remained the same. 

In California, the issue is not population drain, but unsustainable municipal expenses due...

In Part 1 of this series, we examined some of the overarching issues that can make a Chapter 9 restructuring more challenging for creditors than a Chapter 11. The appointment of an emergency manager in Detroit makes it clear that Michigan is taking Detroit’s need to restructure seriously.

Detroit’s problems are well known:

• Geographic sprawl combined with declining residency have led to decreased tax revenue and increased expenses (fewer people live in Detroit now than at any other time since 1920);
• Pension Liabilities are increasing (retiree spending projected to be $1.5 billion between 2013-2017); and
• The city faces disproportionate and unsustainable power of the unions.

So, what should the creditors of Detroit be asking the city on the precipice of its formalized restructuring?

• Who will represent my interests and how can I get a seat at the table? The Bankruptcy Code allows a municipality to propose treatment of a creditor’s claim over that creditor’s objection if certain requirements...

This guest post was contributed by Marti Kopacz, Founder and Managing Principal of Brant Point Advisors LLC.

Kevyn Orr, Detroit’s newly appointed emergency manager, is going to try. Restructuring professionals have long pondered the advantages and disadvantages of solving public sector problems with private sector strategies. As Orr prepares to take control of what may be the country’s most dysfunctional municipality, he has made it clear that the problem solving will be “data driven.” In other words, politics are way down on the list of considerations and maybe even not on the list at all.  Governor Snyder’s selection of Orr was superb: a top notch restructuring professional with Michigan ties (Michigan University and law school grad), deep familiarity with southeastern Michigan thinking as a result of his experience in the Chrysler restructuring, but without the complications of being a community “insider.”

Orr’s three-prong approach: maintain and grow city services, address...

Now that Michigan and Detroit have publicly admitted that Detroit is in world of financial trouble, creditors of Detroit must to ask themselves, “what’s next”?  Before addressing this question, it is important to understand some of the legal, political and practical obstacles that will face the city’s creditors. 

In a typical Chapter 11 bankruptcy case, the lines are easily and clearly drawn. In one corner are the debtors; in the other are the creditors. While there are varying types of creditors (secured, unsecured, subordinated and so forth), their interests and priorities are established by the Bankruptcy Code through the absolute priority rule. While there may be some litigation posturing in an effort to extract additional value for an “out of the money” constituency, generally, the rule of the day is compromise. Contrast this with Chapter 9 where there are additional complications:

• The debtor is afforded greater latitude to act without the approval of the Bankruptcy Court, which...

On Friday, Michigan Governor Rick Snyder published a formal declaration that a financial emergency exists in Detroit. As a result, unless opponents can convince the Governor to change his mind, a three-member emergency loan board appointed by the Governor will select an emergency manager. 

Governor Snyder’s announcement was, in effect, a confirmation of the state financial review team’s conclusion reached on February 19, 2013 that a financial emergency exists in Detroit because there is no satisfactory plan to resolve its extensive fiscal problems. The financial emergency process is occurring under Michigan’s 1990 emergency financial manager law, which became effective again in November after voters repealed a stronger financial manager law by referendum. A new law, passed in a lame duck legislative session and signed by Governor Snyder in December, does not become effective until March 27, 2013. The new law, once in effect, will give the emergency manager increased power, including...

Trial Date Set for Stockton Eligibility

After months of legal wrangling, the legal issues surrounding whether Stockton is eligible to file for Chapter 9 protection will come to a head in a four-day trial beginning on March 25. The trial essentially pits the interests of CalPERS, which contends it is entitled to continue to receive full payment under California law against certain bondholders and bond insurers, who contend that CalPERS’ claim should be treated as an unsecured claim and, therefore, receive the same treatment as the bondholders. 

While the similarity of the claims of creditors should be an issue reserved for confirmation of any plan of adjustment, the creditors seem poised to try to make it a central issue to Stockton’s eligibility to be a Chapter 9 debtor, as Stockton  is required to prove it has satisfied the state and federal hurdles to a Chapter 9 filing. Absent a last minute settlement, the outcome of the trial, which presiding Judge Christopher Klein has promised will...

Michigan’s lawmakers passed new legislation that expands a local government’s options in bankruptcy.  Under the state’s old law, only an emergency manager, with the governor’s permission, could declare bankruptcy on behalf of a government entity. The new legislation allows for a local government to file Chapter 9 earlier in the process. The governor still needs to provide final approval, but in light of Detroit’s financial woes, legislators determined that other options should be available to assist in resolving Detroit’s insolvency. SB 865 provides that if a local government is in a state of financial emergency, the governing body has seven days to select one of four options:

1. Opt for a consent agreement with the state;
2. Appoint an emergency manager;
3. Begin a neutral evaluation process with a mediator; or
4. File for Chapter 9.

The law also gives the local governing body and the mayor the ability to vote out an emergency manager after one year and replace the manager with a mediator. If signed...