Detroit has reached a settlement with its last big holdout creditor, an important step as it seeks to emerge from the largest municipal bankruptcy in US history.

Under the deal, Financial Guaranty Insurance Co, a bond insurer of $1.1bn in Detroit debt, will be able to redevelop the riverfront site of Joe Louis Arena, the home of the Red Wings hockey team. The insurer will replace the stadium with condominiums, hotel, office and retail developments, and receive around $205m in new debt.

The deal was announced on the twenty-second day of the confirmation hearing for the city’s plan to slash roughly $7bn of its $18.5bn in liabilities, and 15 months after the city filed for bankruptcy. The settlement requires the approval of Judge Steven Rhodes, who must find the restructuring plan “fair and feasible” before it can go into effect.

Timothy Travers, chief executive of FGIC, said the company looked “forward to managing our ongoing stake in the city and helping to drive value for Detroit and for FGIC’s stakeholders”.

Last month the city reached a deal with Syncora, another bond insurer holdout, setting the stage for the FGIC deal. Syncora will recover around 14 per cent of what it is owed, including $44.8m in new debt, the lease to operate a tunnel that connects the US and Canada, land and the option of a long-term lease for a parking garage.

The city had reached deals with most of its over 100,000 creditors, including the largest groups, retirees and unions, over the past few months.

Kevyn Orr, the city’s state-appointed emergency manager, is expected to seek City Council approval for the FGIC deal next week.

FGIC had been scheduled to call witnesses against the plan on Thursday before the deal was struck in the early hours of the morning. The insurer and the city have been working on a deal to settle the $1.1bn claim, which relates to a disastrous pension funding deal struck by Kwame Kilpatrick, a former mayor now imprisoned for corruption.

Mr Rhodes has said he anticipates hearing closing arguments next week, and he is expected to issue a ruling in the following months.

The city has testified that the plan is the best way to clear the city’s roughly 80,000 vacant buildings and empty parcels and expand sorely lacking public services. But most of the $1.4bn in reinvestment the plan calls for would only come if the city meets aggressive revenue and cost-cutting targets.

Even if Mr Rhodes does approve the plan many question whether it will set the city – which has seen its population dwindle from 1.85m in 1950 to less than 700,000 – on a path for long-term, sustainable growth.

Critics argue that the plan does not address the region’s long history of racism and segregation and will not address the needs of Detroiters in the 132 square miles of struggling, blighted neighbourhoods that surround its resurgent seven square mile centre.

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