An $800 million settlement underpinning Detroit’s plan to exit from bankruptcy was brokered by biased mediators and should be thrown out, bond insurer Syncora Guarantee Inc. told a federal judge. Syncora, which may be forced to make up bondholder losses should the plan be approved, filed its objection to the proposal yesterday, as Judge Steven Rhodes is to begin a monthlong trial on approving the city’s bid to adjust $18 billion in debt. The plan should be rejected immediately, Syncora argued in court papers, because of flaws in the mediation process that produced the so-called grand bargain settlement. The accord would bring in more than $800 million in exchange for protecting the city-owned Detroit Institute of Arts from creditor liquidation. The settlement is “the product of agenda driven, conflicted mediators who colluded with certain interested parties to benefit select favored creditors to the gross detriment of disfavored creditors and, remarkably, the city itself,’’ Syncora said in its filing. Detroit has proposed cutting some retirement benefits and reducing payments to some bondholders, in addition to tapping the water and sewage department for cash. The money raised as part of the DIA settlement would be used to shore up pensions. Syncora has argued for months that is unfair and that the artworks should be sold to repay it and other creditors. When the trial starts later this month, the judge will consider whether the plan is fair to creditors and feasible. Dozens of witnesses are scheduled to testify.

Plan Can Be Challenged by Counties Detroit’s debt-cutting plan can be challenged by nearby suburban counties when a trial over the feasibility of the proposal starts later this month, a judge ruled. Macomb, Wayne and Oakland counties oppose various aspects of the city’s plan, mainly because the proposal would take money out of the Detroit water system to help bolster an underfunded pension fund. The counties say the transfer may increase utility bills for their residents. “It is not only bad policy to attempt to increase rates to pay past-due obligations, but it also may be impossible to generate additional revenue through rate increases that impose excessive burdens on residents and businesses,’’ Wayne County said in a court filing in U.S. Bankruptcy Court in Detroit. The judge said yesterday in a court hearing that the counties can be included among those eligible to challenge the plan.
— Steven Church and Steven Raphael

This article was taken from the Bloomberg Brief Municipal Market Newsletter.
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