Reuters: Bankruptcy News: UPDATE 1-Bond insurers sue Detroit over Oct. 1 bond default

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UPDATE 1-Bond insurers sue Detroit over Oct. 1 bond default Nov 8th 2013, 16:13 Fri Nov 8, 2013 11:13am EST Nov 8 (Reuters) - Two insurance companies that guaranteed payments on Detroit's voter-approved general obligation bonds sued the city in U.S. Bankruptcy Court on Friday over its Oct. 1 default on payments due bondholders. National Public Finance Guarantee Corporation, the public finance subsidiary of MBIA Inc, and Assured Guaranty Municipal Corp claimed that the city's use of property taxes levied exclusively to pay off the bonds for operating expenses violated Michigan law. The insurers asked U.S. Bankruptcy Judge Steven Rhodes, who is currently determining whether Detroit is eligible for the municipal bankruptcy it filed in July, to force the city to set aside the tax money for bond payments. They also want to make sure that tax money that had been earmarked for payment of the bonds would not be tapped for Detroit's proposed $350 million debtor-in-possession financing with Barclays PLC. Sinking under more than $18 billion of debt and other liabilities, Detroit filed the biggest Chapter 9 municipal bankruptcy in U.S. history on July 18. Prior to the filing, Detroit's state-appointed emergency manager Kevyn Orr included more than $400 million of the city's voter-approved unlimited tax GO bonds in a nearly $12 billion pile of debt he labeled as unsecured. Orr said the city would cease payments on unsecured bonds and that unsecured creditors, including bondholders, would eventually be paid just pennies on the dollar. Orr's treatment of bonds backed by specific Detroit property tax levies and the city's full-faith and credit pledge roiled the $3.7 trillion U.S. municipal market. General obligation bonds traditionally are considered as secured debt, making them one of the safest bets for investors. Detroit's Oct. 1 default on the bonds forced the insurers to make a $9.37 million interest payment to bondholders. Their lawsuit claims Detroit publicly has stated it intends to continue to levy the property taxes backing the bonds, while not segregating the revenue from other city funds. "The city also has indicated that post-petition it is using and intends to continue to use the restricted funds for payment of its general operations. This conduct violates Michigan law," the lawsuit stated, adding that Detroit rejected "numerous efforts" by the insurers to resolve the dispute consensually. The lawsuit also raises concerns over a financing deal Detroit reached with Barclays last month. The deal, which is subject to bankruptcy court approval, would enable the city to get out of costly interest-rate swap agreements at a discount while providing funds to improve city services. Under the deal, Detroit would pledge its income tax and casino tax revenue to secure the loan. If those funds prove insufficient, net cash proceeds from any potential monetization of city assets exceeding $10 million would serve as collateral for the debtor-in-possession loan. The bond insurers' lawsuit asks the court to prohibit Detroit from giving any creditors a "super-priority status" allowing them to tap into the property tax money earmarked for the bonds. Link this Share this Digg this Email Print Reprints

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