27 June 2014

There's No Crying in Chapter 9 (If You're a Bond Insurer)

Go here to read a fascinating bit of news reported by Reuters about Detroit's primary nemesis in its Chapter 9 bankruptcy--bond insurer Syncora Guarantee, Inc. It turns out Syncora guaranteed bonds issued by Detroit with a face value of around $400 million. As matters now stand, Detroit's plan of adjustment promises to pay only a small portion of what's owed those bondholders. Syncora, therefore, will be on the hook for the difference.

So what, you say? Why should anyone care about the fortunes of a business as esoteric as municipal bond insurance? Syncora's investors certainly care because 
Syncora has issued past warnings to investors that it might go out of business, and it cautioned in a recent financial report that investment in Syncora Holdings common shares is "likely to result in a loss of substantially all of their investment."
In other words, as Detroit, so Syncora. That and $2.25 will get you a cup of coffee at Starbucks. Syncora's financial fate will have no bearing on how much Detroit will be required to pay it. If it were, then there are certainly some deserving retirees whose financial futures also hang in the balance.

But Syncora also has a strong legal argument that no matter how big a hit it must take, it shouldn't be any greater than the retirees. "Deserving-ness" doesn't count in bankruptcy and Detroit's plan, which promises only slight cuts to retirees, "unfairly discriminates" against Syncora.

Here I have already agreed with Syncora. My article published in volume 88 of the American Bankruptcy Law Journal, Municipal Bankruptcy: When Doing Less Is Doing Best (download here), argues just that. Chapter 9 of the Bankruptcy Code does not provide any priority for claims of aged retirees vis-a-vis bondholders and their insurers. It certainly should but until Congress acts it doesn't.

I was also disappointed to read of the personal attacks on Syncora's lawyer, James H.M. Sprayregen. I knew Jim from back in the day when I practiced law in Milwaukee and he was nothing other than of the highest legal and personal caliber. Whether he ultimately prevails remains to be seen but I hope the court follows my direction to hold out the threat of catastrophic loss for both sides or dismissal of the bankruptcy case unless they can make a deal.

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