Detroit reaches bankruptcy agreement over $388M in bonds; mediators hope for more deals

Photo: The Canadian Press. All rights reserved.

FILE- In this July 17, 2013, file aerial photo the city of Detroit is seen. Mediators announced Wednesday, April 9, 2014, that the city of Detorit reached a deal in bankruptcy over $388 million in bonds. It is a significant agreement that could influence other creditors to try to get a settlement. The deal still needs the blessing of Judge Steven Rhodes and is only a small part of the $18 billion bankruptcy case, the largest by a local government in U.S. history. (AP Photo/Paul Sancya, File)

DETROIT - The city of Detroit reached a deal in bankruptcy over $388 million in bonds, mediators announced Wednesday, a significant agreement that could influence other creditors to try to get a settlement.

Detroit will pay 74 cents for each dollar. Roughly $50 million in tax revenue that won't be needed to pay the balance instead will go to a fund to help low-income retirees who are expected to see smaller checks when the bankruptcy case ends.

The deal still needs the blessing of Judge Steven Rhodes and is only a small part of the $18 billion case, the largest bankruptcy by a local government in U.S. history.

Detroit emergency manager Kevyn Orr, appointed by the state to run the city, said he hopes to announce more deals soon.

"It's important that people get on the bandwagon," Orr told The Associated Press, referring to other creditors, especially unions, who have been privately meeting with the city and mediators.

Earlier, on CNBC, Orr said he doesn't want to turn to a "cram-down," a bankruptcy term that gives a judge sweeping power to settle disputes.

The aid for low-income retirees was welcomed by a spokesman for the police and fire pension fund.

"However, whether the settlement as a whole is advantageous to the city and to the retirement systems — we just do not know," Bruce Babiarz said.

Detroit hopes to exit bankruptcy by October, but the city's plan first faces a series of court hearings in summer. The most divisive issue: cuts to pensions.

The city is proposing a 6 per cent cut for retired police officers and firefighters, and a 26 per cent cut for other retirees. The difference is tied to the health of the two pension funds.

The size of those cuts assumes that foundations, the state of Michigan and other philanthropists contribute $816 million to help pensioners and prevent the sale of city-owned art. If retirees and city employees reject the cuts, the outside money vanishes and pensions would be slashed even more.

Anthony Sabino, a bankruptcy expert and St. John's University law professor, said the bond deal is a "good sign of progress" in the case.

"We call that taking a haircut," he said. "That's fairly typical for bondholders in a corporate bankruptcy. There usually is a restatement of terms, and the bondholders take some kind of reduction."

Bondholders earlier had been offered 15 cents on the dollar, but Orr said there was a risk that the city would lose access to a property tax earmarked for debt if it didn't make a better deal.

Separately, a group of creditors with eyes on Detroit's art said it has found buyers willing to pay more than $1 billion for parts or all of the collection. Creditors are asking the judge to order Orr to co-operate with interested parties.

New York-based Art Capital Group said it would arrange $2 billion in loans to Detroit with art at the Detroit Institute of Arts used as collateral. Orr, however, told AP he's not interested and will stick with a plan to raise money from foundations and the state.

"We've committed ourselves to that bargain. No one can compel the city to sell assets," Orr said.

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