By Karen Pierog
Feb 21 (Reuters) - Detroit filed a much-anticipated blueprint for dealing with $18 billion of debt in U.S. bankruptcy court on Friday that includes cuts of as much as 80 percent for some unsecured bondholders.
The city's plan of adjustment, which the court must approve before Detroit can emerge from the biggest municipal bankruptcy in U.S. history, also calls for a $1.5 billion program to improve essential services and public safety over 10 years.
The cuts to certain unsecured creditors such as the city's two retirement systems and owners of certain Detroit bonds ranged from 10 percent to as much as 80 percent in the plan.
"We maintain that the plan provides the best path forward for all parties to resolve their respective issues and for Detroit to become once again a city in which people want to invest, live and work," Detroit's state-appointed emergency manager, Kevyn Orr, said in a statement.
Orr acknowledged that pensions will be reduced even though philanthropic foundations and the Detroit Institute of Arts have pledged $465 million and Michigan Governor Rick Snyder has asked the state legislature to approve $350 million to ease the hit on retirees.
Police and fire retirees who agree to the plan would see their benefits cut by just 10 percent, while cuts for the general retirement system's retirees would be around 30 percent, according to the statement.
Investors in debt that Orr has deemed to be unsecured, including some voter-approved unlimited tax general obligation bonds, would fare worse than pensioners under the plan.
Those creditors would see an 80 percent cut in their claims with the 20 percent payout made through a note sale by the city.
That type of haircut will likely upset participants in the $3.7 trillion municipal bond market, where such general obligation bonds have traditionally been considered a safe bet for investors.
Some have warned that if these cuts are accepted, investors will demand to be paid more to lend to Detroit and other Michigan municipalities.
Under the plan, bondholders and other unsecured creditors would potentially share in any increased revenue that results from Detroit's revitalization, according to the city.
A deal to end costly interest-rate hedges was not included in the plan. U.S. Bankruptcy Judge Steven Rhodes, who is overseeing Detroit's case, has twice rejected proposals to terminate the so-called swap deals at a discounted cost.
But an attorney representing the city told Rhodes this week that a new deal would be presented to the court within days.
The swaps were used to hedge interest rate risk for some of the $1.45 billion of pension debt Detroit sold in 2005 and 2006. The swaps soured when both interest rates and the city's credit ratings dropped. Money owed to swap counterparties UBS AG and Merrill Lynch Capital Services was a major element that drove Detroit to bankruptcy court.
Snyder, who authorized Detroit's bankruptcy filing in July, called the plan a "comprehensive blueprint directing the city back to solid financial ground."
"There will be difficult decisions and challenges for all sides as this process moves forward," the Republican governor said in a statement.
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