DETROIT – Emergency manager Kevyn Orr said Detroit will stop making payments on some debt, including one scheduled on Friday, and proposed debt holders take a drastic cut in the money they are owed to stave off the largest municipal bankruptcy filing in U.S. history.
In a meeting with creditors, Orr for the first time presented a detailed proposal calling on the holders of nearly $17 billion in Detroit debt to make substantial concessions.
Orr said the city was "insolvent" and needed shared sacrifices from everyone, including debt holders, to have any hope of a revival.
"Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin," Orr said in a statement.
"We have presented a plan that outlines a comprehensive roadmap for ensuring basic services are delivered to our citizens while aligning our obligations with the reality the City confronts."
The moratorium on principal and interest payments on the city's unsecured debt, including a $34 million payment on pension certificates of participation due on Friday, would allow the city to conserve cash needed to provide services to residents, Orr said.
Unsecured creditors, including bondholders and pension funds, will receive a pro rata share of $2 billion of notes the city would issue and pay off as its financial circumstances improve.
City workers and retirees would also face changes to their pensions and health care coverage "consistent with available funding."
An oversight board would be created for Detroit, similar to one created after New York City's financial difficulties in 1979, that would ensure reforms are sustained, Orr said.
Detroit is the poorest large city in the United States with more than a third of its residents living below the official government poverty line. Its population has shrunk to about 700,000 people and basic services such as police and the fire department have broken down.
Orr, a bankruptcy attorney brought in by the state of Michigan to clean up the city's finances, has said there is a 50/50 chance of a bankruptcy filing.
It would be a first for a major U.S. city as New York, Philadelphia and Cleveland all avoided formal bankruptcy filings, noted Jim Spiotto, a municipal bankruptcy expert at law firm Chapman and Cutler.
Historically, bondholders have not lost the principal amount owed them as a result of financial restructurings of major cities.
Heightened concerns that Detroit's bondholders face payment risks due to a possible bankruptcy filing or debt restructuring led to credit rating downgrades deeper into junk category for Detroit's bonds by Standard & Poor's Ratings Services on Wednesday and Moody's Investors Service on Thursday.
Much of Detroit's debt is insured, giving bondholders protection against future defaults. Two of the insurers, MBIA, Inc and Assured Guaranty, are attending the meeting on Friday, according to their spokespersons.
Also attending the meeting are presidents of the unions that represent Detroit's workers, from civil service to firefighters to police officers.
(Additional reporting by Karen Pierog and Tiziana Barghini; Writing by Karen Pierog and Greg McCune; Editing by Chris Reese)