The Detroit Water and Sewerage Department confirmed it has reached a deal in which it will be able to refinance up to $5.2 billion in debt, a move likely to speed up the city's bankruptcy case and free up cash for the beleaguered department and possibly reduce rates to customers.
The city and water department bondholders and companies that insure the bonds agreed to allow the city to make tender offers on existing bonds. The city could then reissue new bonds at lower interest rates to pay off the old debts.
Bondholders who agree to exchange their current debt for the new bonds would give up their right to protest the city's restructuring plan.
The move comes after weeks of confidential mediation sessions with the city's major bondholders and insurers.
Under bankruptcy law, their bonds are considered secured -- meaning they must be repaid by a dedicated revenue source at 100% of their value. But the arrangement would reduce the amount of interest current bondholders would be paid in the long run.
City lawyer Heather Lennox alluded that a major deal was in the works during a hearing this morning before U.S. Bankruptcy Judge Steven Rhodes in federal court in Detroit. She did not reveal details about whom the deal involved but indicated that it could have a major impact on the length of the big confirmation hearings set to begin Aug. 21 on Detroit's blueprint for exiting the largest municipal bankruptcy in U.S. history.
In voting on the city's plan of adjustment last month, 119 sub-classes of DWSD bondholders voted to reject Detroit emergency manager Kevyn Orr's plan, while only 32 voted yes. They were angry that the city was trying to replace their bonds without paying all future interest.
That vote positioned the water and sewer bondholders as a major opponent of the city during a massive trial starting Aug. 21, when Rhodes will determine the fate of the city's sweeping restructuring plan. But a settlement with the DWSD bondholders and insurers would clear out another significant hurdle for the city during the trial, likely reducing the length of the proceedings.
Two major bond insurers that back DWSD debt -- National Public Finance Guarantee and Financial Guaranty Insurance Co. -- declined to comment Wednesday afternoon.
Earlier today, the Detroit Board of Water Commissioners overwhelmingly approved the issuance of two offers to tender outstanding water and sewer bonds. Under that offer, owners of DWSD bonds would be given the opportunity to voluntarily tender their bonds for repurchase by DWSD, allowing the department to refinance up to $5.2 billion in debt.
"In effect, this transaction has the potential to significantly lower the interest rate on existing DWSD bonds, reduce DWSD's debt service costs, reduce risks and transaction costs, and enhance the department's future cost of borrowing," the department said in a statement. "The savings to DWSD customers could be in the millions."
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