Joel R. Glucksman
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201-896-7095 jglucksman@sh-law.comFirm Insights
Detroit Emergency Manager Halts Debt Payments, Urges Creditors To Accept Pennies on the Dollar
Author: Joel R. Glucksman
Date: June 28, 2013
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Detroit’s appointed emergency manager Kevyn Orr painted a grim picture of the city’s finances in his recent meeting with creditors and investors. Orr, who is tasked with implementing a plan that may help the city avoid falling into bankruptcy law protection, asked creditors and union leaders to accept significantly lesser amounts than what they are owed during the closed-door negotiations.
Orr noted that budget cuts alone will not be sufficient to prevent bankruptcy proceedings, and instead laid out a proposal under which creditors and unions would receive less than 10 cents on the dollar on portions of Detroit’s debt, including unsecured bonds and a percentage of unfunded pension liabilities, the New York Times Reports. These liabilities currently amount to more than $11 billion. Orr is also expected to address additional cutbacks in his upcoming meeting with labor leaders, which will include scaling back health care benefits for retired city workers.
“This is not meant to be a hostile act,” Orr said at a news conference, the Times reports. “It isn’t meant to be combative. It is meant to be an acknowledgment and recognition of the realities that we can no longer deal with.”
In addition to negotiating with creditors and unions, Orr also announced that Detroit will cease making principal and interest payments on a portion of its unsecured bond debt, including a $34 million payment on pension certificates of participation, Reuters reports. Orr said that stopping these debt payments is essential to enabling the city to continue providing public services to Detroit residents.
It is unclear whether the city will be able to avoid filing what would be the largest municipal bankruptcy in the nation’s history, and Orr has called upon creditors and unions to make “shared sacrifices” to prevent this scenario. However, rating agency Moody’s does not have high hopes for city, and recently downgraded several of Detroit’s debt obligations.
“We also believe the city’s risk of bankruptcy has increased over the last six months,” said Moody’s, according to the Times. “All of Detroit’s ratings remain under review for possible downgrade as we analyze the ongoing discussion between the city and its creditors and stakeholders.”
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