23 July 2014

Not Really News About Detroit

Go here to read an article in the Christian Science Monitor reporting two bits of news. First, Detroit's retirees have voted in favor of a Chapter 9 "plan of adjustment" that will trim but not drastically cut their benefits. As I described here, at least one class of creditors must vote in favor of the plan for it to be confirmed and Detroit now has that vote.

But the affirmative vote of one class isn't enough. Ideally, Detroit would get the vote of each and every class of creditors including its long-suffering bondholders like Syncora (here, here, and here). If a class of creditors votes against a plan, Detroit can still confirm it if (and that's a big "if") the court agrees to cram it down. 

Cram down, however, requires that the plan "not discriminate unfairly" and that's the second bit of news reported by the Monitor. Bondholders including Syncora say that they'll fight on the ground that the plan discriminates unfairly against them. In other words, the cuts suffered by retirees are far less than those proposed for the bondholders, which, they will argue, is unfair.

This is hardly news. I posted here  about the likelihood of just such a development. And, for what it's worth, I think the bondholders have a good argument. You can read my published article Municipal Bankruptcy: When Doing Less Is Doing Best (download here) to find out why.

A cage match between Detroit and its retirees on the one side and the bondholders on the other would be an academic delight. It would not, however, be in the best interests of anyone. The "Chickie run" is about to commence. Let's hope someone swerves before anyone drives off the cliff.

No comments:

Post a Comment