March 13, 2013 9:51 pm

Emergency manager heads for Detroit

Kevyn Orr is expected to be appointed as Detroit’s emergency manager in coming days as the city edges closer to restructuring its $14.5bn long-term debt, according to two people close to the situation.

Mr Orr, who works at law firm Jones Day and has a background in restructuring, will be responsible for managing the distressed city’s finances, bypassing the city council which went to court on Tuesday to try to block the appointment.

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Detroit is being watched closely for clues on how a heavily indebted municipality can regain its financial footing and longer-term viability.

“This will be the best case study of what it means to restructure a city,” said one person involved in the process.

Detroit, the largest city in Michigan and once the heart of the automotive industry, has had to downsize and adjust to hard economic realities. Its cost base dates from a time when it had 2m inhabitants but its revenues have plummeted as its population has shrunk to 700,000. The city is facing a budget deficit of $327m.

With the appointment of an emergency manager at the behest of Governor Rick Snyder, Detroit will begin negotiations with creditors including bondholders and workers, both retired and active, over their pension and health claims.

The full extent of Detroit’s liabilities is not yet clear. But analysts and those familiar with the city’s finances say a restructuring will involve investors and other claimants taking losses on their debt investments and other claims. The negotiations would hinge on a still undecided plan that apportions losses across a range of stakeholders.

The budget no longer works. At some point it becomes impossible to kick the can down the road

If the parties involved are not able to reach agreement the city could be forced to file for Chapter 9 in what would be the nation’s largest municipal bankruptcy. Under that law, claims of bondholders and workers are treated equally.

The process will also be highly political. Michigan’s Republican governor and David Bing, its Democratic mayor, are up for election next year, lending urgency to efforts to put the city on a more sustainable path.

Public services have already been cut, making it difficult to cut costs further. And because so many residents have left and taxes are high, raising additional revenue is not practical.

While some cities are starting to feel the recovery in the housing market and the US economy more generally, leading to increased revenues, Detroit is not among them.

“The budget no longer works,” one person close to the process said. “At some point it becomes impossible to kick the can down the road.”

The city has also appointed Miller Buckfire, a restructuring firm, and Jones Day to advise it.

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