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City of Detroit's chapter 9 plan of adjustment confirmed

November 2014

Jones Day served as lead restructuring counsel to the City of Detroit in connection with its chapter 9 bankruptcy case filed in July 2013 and its ongoing restructuring efforts. In connection with this representation, Jones Day (a) assisted in the development and implementation of restructuring proposals, including the chapter 9 plan of adjustment; (b) participated in negotiations with the City's key stakeholder constituencies (including approximately 150 mediations) with the goal of reaching a consensual restructuring; and (c) handled all aspects of the chapter 9 case. The wide-ranging nature of the City's restructuring required Jones Day to perform an equally wide array of legal services, including litigation in multiple venues; the documentation and closing of a multitude of transactions, including the Grand Bargain and redevelopment transactions discussed above; capital raising transactions, labor negotiations, and the structuring of pension and health care benefits, among others. The City of Detroit has estimated that its total outstanding obligations as of the commencement of its bankruptcy case totaled approximately $18.5 billion.

On November 7, 2014, 16 months after the City filed its chapter 9 petition, the Honorable Steven W. Rhodes of the United States Bankruptcy Court for the Eastern District of Michigan issued a bench ruling confirming the City of Detroit's chapter 9 plan of adjustment, paving the way for the City's exit from the largest and most complex municipal bankruptcy case in U.S. history. The ruling followed a 24-day confirmation hearing and many months of out-of-court mediation and negotiations with retiree representatives, bond insurers, labor unions, and other creditor representatives.

The plan reduces the City's estimated $18 billion debt burden by approximately $7 billion, restoring the City's financial solvency. Equally important, the plan establishes the framework for the reinvestment of approximately $1.7 billion over 10 years in a wide array of revitalization projects that will improve the everyday lives of its residents. The improvements include: (a) sweeping blight remediation initiatives; (b) renewed focus on public safety, with significant investment in the City's police, fire, and EMS departments; (c) comprehensive improvements to the City's public transportation system; (d) an overhaul of the City's outdated and obsolete information technology systems; and (e) streamlining the operations of all City departments.

One of the most important aspects of the plan is the global settlement of issues related to the City's pensions and retiree health care. As a result of months of mediation and negotiation between the City, the official committee of retirees appointed by the Bankruptcy Court, the City's pension systems, and major unions and retiree associations, the plan enables the City's pensioners to retain between 95.5% and 100% of their current monthly pension allowance and increases the solvency of the City's retirement systems. This settlement also provides for the establishment of voluntary employee beneficiary associations (VEBAs) to assume the responsibility for providing health care benefits to current City retirees.

This comprehensive resolution of the City's pension and retiree health issues would not have been possible without another settlement – popularly known as the "Grand Bargain" – pursuant to which: (a) the State of Michigan, certain philanthropic organizations, and the Detroit Institute of Arts (DIA) committed a total of $816 million to address the underfunding of the City's pensions; and (b) the world-class art collection housed at the DIA was protected from dismemberment and placed in a perpetual charitable trust for the benefit of the City's residents and the surrounding region.

This "Grand Bargain" is unprecedented – parties with no existing obligation to the City have committed nearly a billion dollars to the City's restructuring efforts and have preserved a critical cultural asset.

The Bankruptcy Court also approved other key settlements and agreements that promise continuing revitalization of the City, including: (a) an agreement with Financial Guaranty Insurance Company (FGIC), an insurer of more than $1 billion of the City's debt, to redevelop the Joe Louis Arena site following the relocation of the Red Wings to their new arena, pursuant to which FGIC would fund the costs of future construction upon the JLA site; (b) a similar agreement to enter into certain redevelopment transactions with Syncora, an active litigant in the chapter 9 case that holds or insures more than $350 million of debt. These redevelopment transactions include: (i) an extension of Syncora's existing lease of the Detroit-Windsor Tunnel; (ii) options to develop certain City property; (iii) a concession for Syncora to operate Detroit's Grand Circus Parking Garage; and (iv) Syncora's commitment to make substantial capital improvements to and investments in the City and its assets; (c) settlements with certain insurers and bondholders of general obligation bonds issued by the City. These settlements resolve significant disputes regarding the priority status of general obligation bond claims under Michigan law while allowing the City to retain millions of dollars in certain existing tax revenues; and (d) the City's landmark agreement with Wayne County, Oakland County, Macomb County, and the State of Michigan to create a regional water and sewer authority.

None of the foregoing would have been possible without the commitment and indefatigable effort of the outstanding mediation team appointed by the Bankruptcy Court.

Other notable accomplishments and precedents in the City of Detroit's chapter 9 bankruptcy case include: (a) the tender of approximately $1.47 billion of Detroit Water and Sewerage Department (DWSD) bonds, the first successful tender transaction in a chapter 9 bankruptcy case. The DWSD tender and related settlement with holders of DWSD bond claims will result in approximately $130 million in savings to DWSD; (b) a settlement between the City and secured creditors arising out of certain interest rate swap contracts, resulting in a 70% reduction of the City's obligations and savings of nearly $200 million; (c) negotiation of new five-year collective bargaining agreements with all major City unions; and (d) adoption of a new hybrid pension plan for employees going forward.

Crucially, the City's achievements under the plan will be preserved by an independent Financial Review Commission to be formed under recently-enacted State legislation, which commission will review the City's performance to ensure that the City complies with the plan, uses sound budgets, develops realistic financial plans, and manages its expenses to meet all of its financial obligations going forward.

In re City of Detroit, Michigan, No. 13-bk-53846 (Bankr. E.D. Mich.)

For additional information about this matter, please contact: David G. Heiman, Bruce Bennett, Heather Lennox

Client(s): City of Detroit, The