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Successful Bond Tender Eases Detroit’s Bankruptcy Exit

News | October 3, 2014

A multi-office, multi-disciplinary team of Kutak Rock public finance and bankruptcy attorneys led by Debbie Sinclair Ruskin, David Lu and Lisa Sturzenberger of the Washington, D.C. office and Tom Roubidoux of the Omaha office acted as underwriters’ counsel and counsel to the dealer manager in connection with the successful tender offer for outstanding bonds and the issuance of approximately $1.8 billion in revenue bonds by the City of Detroit Water and Sewerage Department (DWSD).

A complex and innovative financing, the transaction was especially challenging as the City of Detroit (the City) was the subject of the largest municipal bankruptcy case in history. The City of Detroit had filed for protection under Chapter 9 of the Bankruptcy Code on July 18, 2013 with over $18 billion in debt, including over $5 billion in special revenue bond indebtedness associated with DWSD.

Under its initial plan of adjustment filed in the bankruptcy case, the City had proposed to impair many of the DWSD bonds, either by reducing the stated interest rate of the bonds or by eliminating certain call protections. If confirmed, the City’s plan of adjustment, with its proposed impairment of the DWSD bonds, would have resulted in a significant reduction of the interest costs associated with the existing DWSD bonds. As expected, a number of market participants filed strong objections to the City’s plan of adjustment on account of the proposed impairment. Public finance and bankruptcy lawyers questioned whether a municipality could legally impair special revenue bonds under the Bankruptcy Code. There was also concern the impairment would have a negative impact on the larger public finance marketplace, extending beyond Detroit to municipalities across the country. Nevertheless, the City and its bankruptcy counsel were prepared to move forward with the impairment proposed under the plan of adjustment, with protracted litigation over the impairment appearing inevitable.

As an alternative to the impairment of DWSD bonds, the Kutak Rock counsel, working with investment bankers, financial advisors, financial guaranty insurers, the City’s bankruptcy counsel and DWSD’s attorneys, as well as numerous other stakeholders, developed a financing structure that would rely instead on an invitation for existing DWSD bondholders to voluntarily tender their bonds for purchase by DWSD. In order to provide DWSD with the funds to purchase the tendered bonds, refunding bonds would have to be issued by the Michigan Finance Authority (MFA) on behalf of DWSD and successfully sold in the marketplace. Importantly, the financing structure also provided for (i) the City to file a new plan of adjustment that removed the impairment of all DWSD bonds outstanding following the tender, (ii) creditors that had earlier objected to the City’s plan of adjustment on account of such impairment to withdraw their objections and (iii) additional bonds to be issued by MFA along with the refunding bonds, providing DWSD with additional funds to make much needed improvements to sewer system infrastructure. Because the new DWSD bonds would be secured by liens on the City’s water and sewer revenues and the proposed transaction would potentially resolve a number of plan objections that had been previously filed, Kutak Rock, along with the rest of the financing team, assisted the City in obtaining the approval of the transaction by the U.S. Bankruptcy Court before the start of the confirmation proceedings on the City’s plan of adjustment.

Just four short weeks after the date that DWSD and Detroit had authorized the transaction, Kutak Rock and the rest of the financing team readied the tender for launch on August 7, 2014. Kutak Rock’s client acted as sole dealer manager for the tender, which resulted in over $1.4 billion of outstanding bonds being tendered by existing DWSD bondholders. On August 20, 2014, the City filed its amended plan of adjustment removing the impairment from all DWSD bonds and creditors withdrew their objections to the plan of adjustment that had been filed earlier in the case. Bankruptcy court approval of the financing structure was obtained on August 25, 2014. With Kutak Rock’s client acting as lead underwriter, on September 4, 2014, approximately $1.8 billion in investment grade rated refunding and new money bonds were successfully sold by MFA on behalf of DWSD in a public offering drawing over $7 billion in orders. In addition to ending some of the opposition regarding the City’s bankruptcy plan, the transaction should save the City approximately $250 million in interest costs.

On November 12, 2014 the U.S. Bankruptcy Court entered its order confirming the City’s Eighth Amended Plan for the Adjustment of Debts, permitting the City of Detroit to exit bankruptcy.