Detroit Resurrected by Nathan Bomey

Author:Nathan Bomey
Language: eng
Format: epub
Publisher: W. W. Norton & Company
Published: 2016-12-16T16:00:00+00:00

CHAPTER 10

David Heiman didn’t even need a haircut. His short-cropped light-gray hair was fine.

But when Judge Gerald Rosen interrupted an intense mediation session to announce that it was time for his regular haircut, the Jones Day bankruptcy attorney figured he would tag along for a trim. It had been weeks since Kevyn Orr’s team proposed the first version of a plan of adjustment in February 2014. Although funds for the grand bargain were beginning to materialize, the City of Detroit was making no progress in its bid to reach a settlement with its unlimited-tax general obligation (UTGO) bondholders, a group of financial creditors that was incensed at the city’s attempt to cut its debt.

The city had proposed payouts of twenty cents on the dollar for all of its unsecured bondholders, which roiled Wall Street. The municipal finance community had always believed that bonds receive a higher priority in the grand scheme of municipal debt than pension obligations. But the city had made a better offer to pensioners, effectively favoring retirees over bondholders. That reflected a precedent that Wall Street was desperate to avoid.

“That mediation had been going on for a long time,” Heiman said. “It was getting nowhere fast.”

The city’s UTGO bondholders, led in the confidential negotiation sessions by investment firm Blackstone restructuring chief Tim Coleman, held about $388 million in debt that Detroit had issued over the previous fifteen years for specific purposes—such as to finance infrastructure projects throughout the city.

But Jones Day argued that Chapter 9 bankruptcy eliminated the city’s pledge to use its “full faith and credit” to pay bondholders in full. Detroit wanted to divert the stream of tax revenue that voters had authorized for UTGO projects into its general fund, where it could be used to pay for police, fire, and other basic services.

The UTGO bond insurers—Assured, Ambac, and National Public Finance Guarantee—feared that Detroit’s attempt to treat their debt as general unsecured obligations could entice other cities to consider a similar move to improve their balance sheets.

After they reached an impasse, Coleman and Heiman tagged along with the judge to Francesco’s Barber Shop on the ninth floor of the Ford Building on Griswold Street in downtown Detroit. They warned Frankie the barber that they would be discussing confidential material that must remain secret under the court’s mediation privilege.

“You know,” Heiman told Coleman, “we’re probably just gonna have to litigate this and get the court to decide.”

As Frankie the barber trimmed away, Rosen’s phone rang. It was Governor Rick Snyder.

“Guess where I am?” Rosen told Snyder. “I’m at the barber shop. We’re talking about UTGOs.”

“Let me know if there’s something we can do to help,” Snyder replied.

Frankie the barber jumped in.

“Tell the governor I saw him on TV,” Frankie told Rosen. “It looks like a butcher’s been at his hair.”

The mood lightened as the negotiators resuscitated their attempt to reach a settlement. Heiman and Coleman started to find common ground.

One of Rosen’s mediators, Chapter 9 veteran and U.S. bankruptcy judge Elizabeth Perris of Oregon, had

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