UPDATE 2-Detroit manager's hope: a clean balance sheet in 14 months

Wed Aug 7, 2013 9:04pm EDT

By Nick Carey

DETROIT Aug 7 (Reuters) - Detroit's emergency manager voiced confidence on Wednesday that the city could emerge from bankruptcy before his term expires in October 2014 and possibly without having to borrow more money.

Even so, Kevyn Orr, the bankruptcy expert who was appointed in March to a post that gives him almost unlimited power over Detroit's finances, warned that the path back to financial health will not be painless for Detroit's creditors.

If the city wins court approval to proceed with the Chapter 9 bankruptcy filing it made last month, virtually all of the city's creditors will have payments on their bonds reduced, he said.

"We may need a little bit of cash, or we may be able to stay cash-flow free-and-clear without borrowing anything for the purposes of the bankruptcy," Orr told Reuters in a wide-ranging interview. "The schedule we're on, we should be able to get this done in 14 months, so I don't anticipate a need for me to stay on."

Detroit's bankruptcy has marked a new low for a city formerly renowned as the cradle of the U.S. auto industry and central to America's role as the "arsenal of democracy" in World War Two.

The city's population has fallen from its peak of 1.8 million people in 1950 to around 700,000 as manufacturing jobs moved elsewhere along with the white population. Financial mismanagement and political corruption have made things worse.

The bankruptcy process is expected to be protracted and rough on creditors, who have been offered pennies on the dollar for the city's $18.5 billion in long-term debt.

Orr said he anticipates "a lot of jousting" between creditors in federal bankruptcy court but warned that he expects virtually all the city's creditors, even investors in the city's general obligation bonds, will have to accept reduced payments as part of the bankruptcy process.

"Most unsecured debt in bankruptcy gets a haircut," Orr said. "That's just what happens."

General obligation bonds, which are backed by tax revenue, have long been considered the safest class of municipal debt.

Michigan Governor Rick Snyder, a Republican, appointed Orr as emergency manager in March to tackle Detroit's financial crisis. In mid-July Snyder approved Orr's request to file for a Chapter 9 municipal bankruptcy.

'DRAFT HORSE'

Orr said his team of lawyers and advisers is seeking to make it through a grueling schedule in federal bankruptcy court at a pace viewed as aggressive by most outsiders. It would leave Orr little time to focus on corrupt practices in the city's past or on whether its borrowing was properly handled over the years. "I'm a draft horse with blinders on going uphill," he said.

The emergency manager said he did not anticipate any form of bailout from the state of Michigan during the bankruptcy process but thinks there will be "a lot of state support upon exit (from bankruptcy), and I expect I'll probably recommend to the governor and the state that there be some additional legislative oversight."

U.S. Bankruptcy Judge Steven Rhodes is to rule on whether Detroit is eligible for Chapter 9 protection in a trial to begin on Oct. 23. Orr expressed confidence the bankruptcy filing would be approved.

Rhodes has ruled that the federal bankruptcy proceeding overrides challenges from retirees and pension funds to Michigan's emergency manager law that started in state court.

Orr said he believes he has legal arguments to overcome any effort to use state law to prevent the bankruptcy from going ahead.

He said talks with Detroit's neighboring counties over the creation of a regional water and sewage authority were progressing well, with the suburbs keen on playing a role in the new authority. He ran through a long list of possible assets the city could sell, including its airport and parking meters.

The city said on Monday that it had hired Christie's auction house to appraise the city-owned portion of the Detroit Institute of Art's 60,000-piece collection, a move Orr said was mostly to determine what exactly the collection contains. He left open the option of selling off some of the DIA's works.

"Whether you have to sell grandma's heirloom china and your wedding silver is a big issue," Orr said. Detroit "shouldn't have to sell that stuff, but it's not a resolved issue by any measure."

Orr also addressed one of the biggest concerns: what will happen to pension benefits for Detroit's public employees. The city's retirees outnumber the active workforce by more than two to one.

"There are assets in both pension funds," he said. "So there's going to be pensions. The question becomes how do you divvy that up."

Orr said current retirees in particular could argue they should receive more than younger workers who have decades left in their careers.

"The guy or gal who's 35, they have a chance to go to defined contribution, get another job, get a second-job supplement, get married, handle their affairs," he said. "Frankly there's some validity to that kind of argument."

'ZERO' POLITICAL ASPIRATIONS

If Detroit is found eligible for bankruptcy, the case will generate immense interest since there have been relatively few municipal bankruptcies over the past eight decades and none on the scale of Detroit's. When asked if he was concerned about the precedents Detroit might set, Orr said: "I'm a fiduciary for this city. I cannot be concerned about what dreams may come from the result of what we do."

The emergency manager acknowledged that his mission was not a popular one. Orr's appointment has rendered the city's elected council largely powerless and critics have described him as a dictator.

"I think a lot of Detroit residents will be very happy to see me go," he said. Still, he is not concerned for his safety. "I've been hung in effigy in several venues in my lifetime."

Detroit held a primary on Tuesday that selected two mayoral candidates who will square off in a general election in November. Whoever wins is likely to take over once Orr leaves. He said both candidates for mayor seem to love the city and want to move forward.

"I hopefully will leave them with a clean balance sheet - the first time in a long time for the city - (and) a more agile city government," he said.

Asked whether he had had any political aspirations himself before being appointed or based on his experiences in Detroit since March, Orr said: "Zero. And after this, negative zero."

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Detroit looking at art it could sell, emergency manager says

By Joseph Lichterman

DETROIT | Wed Aug 7, 2013 9:46pm EDT

DETROIT Aug 7 (Reuters) - Detroit is sorting through the Detroit Institute of Arts' collection to see what it could sell to raise funds, the city's emergency manager said on Wednesday, touching on a contentious issue in the largest U.S. municipal bankruptcy filing.

"It's not a high priority" to sell the art, Emergency Manager Keyvn Orr said in an interview with Reuters.

But a detailed evaluation of the 60,000-piece collection is part of a broad review of city assets, including its water and sewage department, Coleman A. Young International Airport and the Detroit-Windsor Tunnel, he said.

The prospect of putting the museum's art up for sale has sparked furious debate throughout the city and its suburbs. The museum and Michigan Attorney General Bill Schuette have said Detroit cannot sell the art because the works are held in a charitable trust for people in Michigan - a position with which the emergency manager disagrees.

Orr said he has never visited the DIA, though he has studied the museum's art collection, which includes an 1887 self-portrait by Vincent van Gogh and a 27-panel fresco by Mexican artist Diego Rivera.

"I actually took an art history course years and years ago, and the stuff I read about is there," Orr said.

On Monday the city said it had hired auction house Christie's to appraise the DIA's collection. Orr said he would make a decision about what to do with the art after Christie's completes its review, perhaps by mid-October.

Despite the size of the DIA's collection, only 5,000 or so works are on display at one time. Orr said about 35,000 works are not subject to bequests or other obligations that would limit the ability to sell them.

"Once we find out what we're talking about, that'll probably lead the discussion about what we can and can't do," he said. "I'm not being flippant, I'm just being very careful because every time I say something about the DIA it's another three weeks of, 'Orr the Luddite is getting ready to sell our family jewels.'"

The city, which owns the DIA collection, and its creditors are discussing ways to restructure $18 billion in debt and unfunded pension liabilities after it filed the largest municipal bankruptcy in U.S. history last month.

Orr said he has not ruled out any options, including an outright sale of the collection, or using some or all of it as collateral for new loans to the city.

Only 5 percent of the collection was bought with city funds, according to Tim Burns, executive assistant to the museum's director.

The emergency manager said many works "may not have been seen for decades," and that the city must determine what is worth selling.

"If you have to sell 10,000 pieces to get ten dollars, why would you do that?" Orr asked.

'15 BUCKETS'

Aside from the DIA, Orr said there are "15 buckets" of assets that the city is valuing and considering monetizing. He mentioned Coleman A. Young International Airport, the Detroit-Windsor Tunnel, parking lots and other city-owned assets and land.

The airport sits on 264 acres (107 hectares) on the city's east side. There is a 53,000-square-foot (4,925-square-meter) passenger terminal, but the airport only serves private planes and cargo aircraft.

About 225 planes are served daily at the airport, and 175 planes are based there, according to the city's website.

Detroit's primary commercial airport is Detroit Metropolitan Wayne County Airport, located about 20 miles (32 kilometers) west of the city.

Orr called Coleman Young "underutilized" and said he was uncertain how much it could fetch.

The tunnel connecting Detroit and Windsor, Ontario, is jointly owned by both cities. But it is operated by the privately owned American Roads LLC, which filed for bankruptcy protection last month in a bid to restructure $830 million in debt.

Traffic levels have fallen short of projections since it took on the debt in 2006, a factor American Roads blames on Detroit's population decline.

Orr described Belle Isle, a 982-acre (398-hectare) island park in the Detroit River, as a special case.

In January Michigan offered to lease Belle Isle from the city, agreeing to assume $6 million in annual operating costs. But the Detroit City Council balked at the proposal, and Governor Rick Snyder pulled the deal.

Orr said the city was probably going to seek a similar deal that would turn Belle Isle into a state park, but said there was no target date for completing it.

He added that the city would save another $10 million if the state agreed to perform some deferred maintenance.

A deal with the state "makes more sense than anything else," Orr said. "We want to keep it as a refuge for the city to use."

(Reporting By Joseph Lichterman; Editing by Xavier Briand)

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Tier 2 costs to rise as investors reassess CoCo risk

Thu Aug 8, 2013 4:22am EDT

* Bail-in risks prompt capital reassessment

* Investor evolution benefits CoCo issuers

* Credit Suisse prepares for further CoCo issuance

By Aimee Donnellan

LONDON, Aug 8 (IFR) - Raising vanilla Tier 2 capital is to become a more costly exercise, as investors cozy up to low-trigger total loss CoCos that similarly put their principal on the chopping block in a bank failure, but offer much higher yields.

Last week, Credit Suisse priced a USD2.5bn low-trigger total loss contingent capital (CoCo) with a coupon of 6.5%, just 150bp back of where its vanilla Tier 2 bonds were trading, and bankers say they expect this pricing gap to tighten even further.

"Investors are now realising that almost every debt instrument carries some level of bail-in risk with increased regulatory clarity," said Sandeep Agarwal, head of European DCM at Credit Suisse.

Although it makes sense for bankers to be making this argument - particularly those from banks that are being encouraged by their regulators to issues CoCos - what is surprising is that investors agree.

Societe Generale was first to suffer the effects of this relative value turnaround when it struggled to convince accounts to buy into its aggressively priced EUR1bn 4% 10-year vanilla Tier 2 bullet in May. The deal emerged only two weeks after UBS offered nearly 150bp more for a USD1.5bn 10-year non-call five-year low-trigger CoCo.

At the time, investors said they could not rationalise buying a French bank that was exposed to a number of problems in the periphery over a Swiss institution that is now focusing on wealth management, regardless of the total write-down language.

And last week, Credit Suisse benefited from the same viewpoint.

"Although vanilla Tier 2 is viewed as safer than CoCos, there is still considerable risk for a Lower Tier 2 bondholder if a bank runs into trouble," said Robert Montagu, a senior financials analyst at ECM Asset Management.

"Situations like SNS and Cyprus have made investors demand more spread for the risk that they are taking."

CAPITAL RE-EVALUATION

Indeed, shock legislative moves this year by the Dutch and Cypriot governments that wiped out investors' Tier 1 and Tier 2 bonds led to a complete re-evaluation of subordinated debt.

"Everyone realises now that if you are an investor in subordinated debt you are fair game in a bail-in scenario," said a DCM banker.

For this reason, accounts are now willing to accept a smaller concession for instruments that have total loss language.

Investors say that when you assess the figures, low-trigger CoCos offer ample compensation for the risk.

Credit Suisse's bonds will be permanently written down to zero if the bank's Common Equity Tier 1 (CET1) capital to risk-weighted assets ratio drops below 5%.

This means that for a bank like Credit Suisse with a CET1 ratio of 15.3% and 2.8% of high trigger Buffer Capital Notes, there is a cushion of over 1300bp before investors will be wiped out.

CHANGING MARKET

It must be said that Credit Suisse is in something of a unique CoCo situation.

It was the first bank to test the product with new investors and, according to Kim Fox-Moertl, head of capital management in Credit Suisse's global treasury, investors have grown more and more comfortable with the product.

"The tone of conversation we are having with investors has completely transformed over the past two-and-a-half years," she said.

"At first we were speaking about the logic of CoCos and the concept of loss absorption, but now investors are much more comfortable with the price and strength of the product."

In the wake of the bond sale, Credit Suisse says it has plans to do a follow-up deal in the coming year as it seeks to meet the Swiss regulator's requirements and take advantage of the growing appetite for high-yielding instruments.

The USD6.6bn of demand the deal attracted has sent a clear message to other European and UK banks that investors are willing to buy these instruments despite the risk of being written down to nothing.

"This is a very important product to Credit Suisse as an issuer and we will look to issue in a range of maturities and currencies in follow-up transactions," said Credit Suisse's Fox-Moertl. (Reporting by Aimee Donnellan; Editing by Julian Baker and Philip Wright)

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Falcone's Harbinger sues Dish Network's Ergen over LightSquared

By Billy Cheung

Tue Aug 6, 2013 6:07pm EDT

Aug 6 (Reuters) - Phil Falcone's hedge fund sued satellite TV mogul Charlie Ergen and his Dish Network Corp for $4 billion on Tuesday for an alleged loan-trading scheme aimed at stripping Falcone of his control over LightSquared Inc, a bankrupt wireless communications business.

The lawsuit in the U.S. Bankruptcy Court in Manhattan was filed on Tuesday at the same time Ergen was confirming on an earnings call with Dish investors that the company was interested in acquiring LightSquared.

Billionaire Ergen has turned his focus to LightSquared after bowing out of a takeover fight for another wireless company, Sprint Corp, which agreed to a deal with Japan's SoftBank Corp. Ergen increased his bid for LightSquared to $2.2 billion last month.

That bid is meant to kick off an auction planned for December, though Tuesday's lawsuit could throw that off course.

LightSquared is a provider of satellite-based mobile voice and data services to hundreds of thousands of devices used in the public safety, security and asset-tracking sectors. It is building a 4G LTE broadband mobile network that it says will serve 260 million people.

The lawsuit by Falcone's Harbinger Capital Partners alleges that Ergen and his affiliates engaged in a complex fraudulent scheme to become LightSquared's biggest lender. That position was then used to strip Falcone of the company.

The lawsuit seeks $2 billion in compensation and $2 billion in punitive damages. It also seeks to undo purchases of LightSquared loans by affiliates of Ergen.

The complaint alleges that Ergen used a specially created investment management firm to amass the largest holding of LightSquared loans, even though a credit agreement prevented competitors from buying such loans.

The investment vehicle -- Sound Point Capital -- deliberately concealed ties to Ergen, even after Falcone's fund inquired, according to the complaint.

The ties to Ergen were concealed for more than a year, and during that time Sound Point acquired more than $1 billion of LightSquared loans, according to the lawsuit. That loan investment was large enough to prevent LightSquared from negotiating a consensual bankruptcy plan.

"The defendants wrongfully have interfered with Harbinger's efforts, and this suit seeks to hold them accountable," said the lawsuit filed by David Friedman of Kasowitz, Benson, Torres & Friedman, which represents Harbinger Capital.

Ergen on Tuesday denied wrongdoing.

"I personally followed all of the rules. I think Dish has followed all the rules and we responded in an appropriate way," Ergen said on the call. "We'll let the courts and public opinion decide who is fraudulent and who's not."

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CORRECTED-Falcone's Harbinger sues Dish Network's Ergen over LightSquared

Tue Aug 6, 2013 11:38pm EDT

(Corrects sixth paragraph to clarify LightSquared is still under Falcone's control)

By Billy Cheung

Aug 6 (Reuters) - Phil Falcone's hedge fund sued satellite TV mogul Charlie Ergen and his Dish Network Corp for $4 billion on Tuesday for an alleged loan-trading scheme aimed at stripping Falcone of his control over LightSquared Inc, a bankrupt wireless communications business.

The lawsuit in the U.S. Bankruptcy Court in Manhattan was filed on Tuesday at the same time as Ergen was confirming on an earnings call with Dish investors that the company was interested in acquiring LightSquared.

Billionaire Ergen has turned his focus to LightSquared after bowing out of a takeover fight for another wireless company, Sprint Corp, which agreed to a deal with Japan's SoftBank Corp. Ergen increased his bid for LightSquared to $2.2 billion last month.

That bid is meant to kick off an auction planned for December, though Tuesday's lawsuit could throw that off course.

LightSquared is a provider of satellite-based mobile voice and data services to hundreds of thousands of devices used in the public safety, security and asset-tracking sectors. It is building a 4G LTE broadband mobile network that it says will serve 260 million people.

The lawsuit by Falcone's Harbinger Capital Partners alleges that Ergen and his affiliates engaged in a complex fraudulent scheme to become LightSquared's biggest lender. Harbinger alleges Ergen is trying to use that position to strip Falcone of the company.

The lawsuit seeks $2 billion in compensation and $2 billion in punitive damages. It also seeks to undo purchases of LightSquared loans by affiliates of Ergen.

The complaint alleges that Ergen used a specially created investment management firm to amass the largest holding of LightSquared loans, even though a credit agreement prevented competitors from buying such loans.

The investment vehicle -- Sound Point Capital -- deliberately concealed ties to Ergen, even after Falcone's fund inquired, according to the complaint.

The ties to Ergen were concealed for more than a year, and during that time Sound Point acquired more than $1 billion of LightSquared loans, according to the lawsuit. That loan investment was large enough to prevent LightSquared from negotiating a consensual bankruptcy plan.

"The defendants wrongfully have interfered with Harbinger's efforts, and this suit seeks to hold them accountable," said the lawsuit filed by David Friedman of Kasowitz, Benson, Torres & Friedman, which represents Harbinger Capital.

Ergen on Tuesday denied wrongdoing.

"I personally followed all of the rules. I think Dish has followed all the rules and we responded in an appropriate way," Ergen said on the call. "We'll let the courts and public opinion decide who is fraudulent and who's not." (Writing by Tom Hals; Editing by Dan Grebler)

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PRESS DIGEST-New York Times business news - Aug 7

Wed Aug 7, 2013 2:17am EDT

Aug 7 (Reuters) - The following are the top stories on the New York Times business pages. Reuters has not verified these stories and does not vouch for their accuracy.

* The Justice Department sued Bank of America on Tuesday, accusing the bank of defrauding investors by vastly understating the risks of the mortgages backing some $850 million in securities. The lawsuit adds to the hefty legal burden of the bank, which has been badly battered by mortgage-related losses and litigation since the financial crisis. ()

* It would not be surprising to see Amazon Chief Executive Jeff Bezos worry little about turning a quick profit at his new acquisition, The Washington Post, and instead try to shake up the newspaper industry with innovation. ()

* President Obama endorsed efforts in the Senate to wind down mortgage finance giants Fannie Mae and Freddie Mac and end their longtime implicit guarantee of a federal government bailout. ()

* Walt Disney Co's net income fell 36 percent in its third quarter, in part because of marketing expenses for the flop "Lone Ranger", forcing it to take a write-down of up to $190 million in the current quarter. Operating income from ESPN and Disney's theme parks rose 8 percent and 9 percent respectively, driving Disney's financial performance. ()

* Federal Reserve regional presidents Charles Evans and Dennis Lockhart suggested on Tuesday that the central bank could ease its extraordinary efforts to stimulate the economy sooner rather than later, but stopped short of providing an exact time frame. ()

* Swiss bank UBS AG agreed on Tuesday to pay $50 million to settle federal accusations that it misled investors about a complex mortgage security, a transaction that loomed over the government's recent legal battle with a former Goldman Sachs trader blamed for his role in creating a similar security. ()

* Hedge fund tycoon Philip Falcone filed a lawsuit on Tuesday that accused the satellite television mogul Charles Ergen of colluding with another hedge fund in a "fraudulent scheme" that prevented his broadband wireless company, LightSquared, from emerging out of bankruptcy. ()

* Detroit's financial woes have brought renewed scrutiny to public pension plans. Senator Orrin Hatch, Republican of Utah, and others have suggested overhauling these plans to shift more responsibility to the private sector. Private insurance companies would assume responsibility for these defined benefit plans, offering annuities to beneficiaries in exchange for employer-paid premiums. ()

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Detroit says to start assessing value of city-owned assets

DETROIT | Mon Aug 5, 2013 5:28pm EDT

DETROIT Aug 5 (Reuters) - Detroit officials will begin to assess the value of all city owned assets, including the Detroit-Windsor Tunnel and part of the Detroit Institute of Arts (DIA) collection as part of the city's efforts to restructure.

"The City must know the current value of all its assets, including the city-owned collection at the DIA," Emergency Manager Kevyn Orr said in a statement on Monday.

Detroit, which filed for Chapter 9 bankruptcy protection last month, will hire outside experts to value its assets including parking garages, parking meters, real estate and the Coleman A. Young International Airport.

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CORRECTED-UPDATE 3-Detroit retirees win seat at table in bankruptcy filing

Mon Aug 5, 2013 5:31pm EDT

(In 5th paragraph corrects to show that date for trial on bankruptcy eligibility has been set, not that the date still needed to be set)

By Nick Carey and Joseph Lichterman

DETROIT Aug 2 (Reuters) - In a high-stakes hearing on Friday in Detroit's bankruptcy filing, a judge approved a city plan to form a creditors' committee of retired workers, but gave unions and pension funds that opposed the plan a measure of satisfaction by declaring an independent trustee - and not the city - will select committee members.

Federal bankruptcy Judge Steve Rhodes' ruling on the city's effort to create a new negotiating partner independent of unions and pension funds was a key moment in a three-hour session that packed the largest courtroom in Detroit's downtown federal building. Rhodes also put off setting a date for a hearing on Detroit's eligibility to file for bankruptcy, while Detroit lawyers disclosed an ambitious aim to present a plan for reorganization by the end of 2013.

Detroit, whose course in bankruptcy court is being set by a state-appointed emergency manager, Kevyn Orr, set its target date at least three months earlier than the March 2014 deadline Rhodes previously had proposed.

Outside of court, Orr on Friday also proposed a new healthcare plan for city workers that would save Detroit $12 million annually by raising deductibles and trimming the number of available plans.

The next step in the largest U.S. municipal bankruptcy will be a trial beginning on Oct. 23 to determine whether Detroit is eligible for a Chapter 9 bankruptcy. To remain in bankruptcy court, Detroit must prove it is insolvent and has negotiated in good faith with creditors owed more than $18 billion, or that there are too many creditors to make negotiating feasible.

Pension funds and unions representing city workers are expected to contest Detroit's eligibility.

An attorney for the city also disclosed Detroit is in regular but pointed dialogue with creditors even while in bankruptcy court. "There are significant differences that we feel will be difficult to breach," said David Heiman, an attorney who represents the city.

CONTENTIOUS COMMITTEE ISSUE

Detroit, a former manufacturing powerhouse and cradle of the U.S. automotive industry and Motown music, has struggled for decades as companies moved or closed, crime surged, and its population dwindled. The city's revenue fell short of spending, while city budgets and borrowing ballooned.

The city now says it can't afford to pay its retired workers the pensions and benefits they were promised. The committee that the trustee will select could help determine how much money and benefits the retirees may lose.

Unions argued the committee should include labor union representatives. They also asked the judge to adjust his proposed timetable for the case to allow the committee to become established and permit negotiation and mediation with the city.

U.S. Trustee Daniel McDermott will form the committee, though Judge Rhodes has the power to reject the committee's composition if it lacks adequate representation.

Brian O'Keefe, an attorney who represents associations of retired Detroit police, firefighters and city employees, said it was important the city not dictate the committee's composition.

"We were objecting to the fact that it seemed like the city wanted to be involved in the structuring of the committee and I think Judge Rhodes made it clear that it really will be up to the U.S. Trustee," said O'Keefe.

PENSION DISPUTE

The judge approved the city's offer to pay costs associated with the retiree committee's work. And Edward McNeil, the lead negotiator for a coalition of 33 of Detroit's 48 labor unions, told Reuters the union expects the city's funding to cover the cost of an independent actuarial study of the city's unfunded pension liability.

Orr, the city's emergency manager, contends the city faces $3.5 billion in unfunded liability, though the city prior to Orr's estimate in June had put the unfunded liability at $644 million for 2011. A larger unfunded liability could increase pressure on retirees and workers to make concessions to help Detroit fix its failed finances.

Estimates of pension valuations vary widely based on a number of factors, including return on investments and 30-year amortization of pension obligations. Rachel Barkley, a municipal credit analyst at Morningstar who studied the way Detroit calculated pensions valuations, said Detroit was within industry norms in its calculations.

"We feel an 8 percent investment return may not be conservative but definitely would be defensible by the city," she said.

BANKRUPTCY TIMELINE

Lawyers for some city unions argued Judge Rhodes' proposed schedule for the eligibility phase - at which the city must prove it belongs in bankruptcy - was too tight and left little time for discovery. Rhodes had proposed an Oct. 23 trial date.

"The whole schedule as a package is fairly aggressive," said Babette Ceccotti, a lawyer for the United Auto Workers, one of the city's unions.

Rhodes did not set a firm date for the eligibility trial and said he would consider concerns about scheduling and set an Aug. 21 date for the next hearing in the case.

During the hearing, Rhodes said he intends to appoint an examiner to review the fairness of fees charged by Detroit's lawyers and other service providers.

He gave the parties seven days to nominate candidates for the job. He also put off any action on a simmering debate over a deal Detroit struck with counterparties to interest-rate swap agreements that would save the city more than $70 million.

Detroit's target of filing a reorganization plan by year-end compares with the March 1 date proposed earlier this week by Rhodes. While the city would "enthusiastically accept" the judge's deadline, Heiman said, it wants to move faster.

"Our view is that time is our enemy," Heiman said. "The facts are not going to change no matter how long we wait. ... So we aim to file a plan by the end of the year."

The target date for Detroit's reorganization plan may prove tough to meet if recent municipal bankruptcies are any guide.

Stockton, California, took nearly a year just to prove its eligibility for Chapter 9 bankruptcy, and San Bernardino, California, is still awaiting a declaration more than a year after filing for protection.

Detroit's bankruptcy has drawn national attention at a time when many cities and states are dealing with budget deficits and pension crises.

St. Louis Federal Reserve President James Bullard, in remarks after speaking at a Boston conference Friday, warned bankruptcy will not be a quick fix.

"Declaring bankruptcy is no panacea," Bullard said. "It is not a solution. It is a mess." (Additional reporting by Deepa Seetharaman, Hilary Russ and Ed Krudy. Writing by Karen Pierog; Editing by David Greising, Nick Zieminski, Phil Berlowitz and Lisa Shumaker)

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UPDATE 2-Detroit launches 2-month review of city assets

Mon Aug 5, 2013 7:09pm EDT

By Joseph Lichterman and Deepa Seetharaman

DETROIT Aug 5 (Reuters) - Detroit will begin to assess the value of its assets, including parking meters, real estate, and a portion of the Detroit Institute of Arts (DIA) collection, in what the city called a "necessary part" of its restructuring efforts.

The city said on Monday it has hired famed auction house Christie's to appraise the city-owned portion of the DIA's 60,000-piece collection as well as advise Detroit officials on how to realize value for the art without selling it.

Detroit is also hiring outside experts to gauge the value of assets including parking garages, the Detroit-Windsor Tunnel and the Coleman A. Young International Airport.

"It doesn't mean that we have any particular plans to sell any particular assets in any sort of fashion," Detroit Emergency Manager Kevyn Orr said in a video posted to his YouTube account.

"We have an obligation to perform our duties as a debtor in bankruptcy to make sure we account for all the assets of the city," he added.

Orr wants to finish the assessment by mid-October, in time for the next big step in the bankruptcy process, the October 23 court hearing on whether Detroit is eligible to enter Chapter 9.

"We don't want to lose any time after eligibility has been declared," city spokesman Bill Nowling said in an interview. He added that Detroit tapped Christie's so early in the process because "we think that's going to take the longest amount of time."

Detroit and its creditors are discussing ways to settle at least $18 billion in debt and unfunded liabilities after it filed for bankruptcy protection last month.

Creditors asked for the valuation of city-owned assets, which is a typical part of the bankruptcy process. This effort does not "portend a sale of any asset," Orr said in a statement.

The possibility of selling artwork from the museum has drawn intense criticism, but advocates of the move say preserving art should not outweigh the need to pay pensions and benefits to city workers.

The museum's collection includes an 1887 self portrait of Vincent van Gogh and a 27-panel fresco by Mexican artist Diego Rivera. Roughly 5 percent of the collection was bought with city funds, according to Tim Burns, executive assistant to the museum's director.

"The City must know the current value of all its assets, including the city-owned collection at the DIA," Orr said. "There has never been, nor is there now, any plan to sell art."

'DEEPLY DISAPPOINTED'

Annmarie Erickson, chief operating officer of the Detroit Institute of Art, said she had heard through media reports that Christie's had been hired by the city.

"We are deeply disappointed that Christie's is taking this action, which we believe is contrary to the well-being of the museum," Erickson said.

The museum has said the art cannot be sold because it is held in a charitable trust for the people of Michigan, a position backed by state Attorney General Bill Schuette.

The DIA also hired bankruptcy attorney Richard Levin and set aside funds for legal expenses.

Alternatives to flat-out sales include creating a public-private partnership to run the museum or leasing some of the finest pieces in the collection for a global exhibition that museums would pay to show, arts experts said.

"For example, if the works were sold to donors willing to give the art back to the museum, that's a possibility," said L. Eden Burgess, an attorney with Cultural Heritage Partners who advises on auctions, purchases and sales.

"That way, the art could stay in the city but there still could be value realized from it. That's one possibility. There may be others as well," Burgess said.

Erickson said the museum, which has faced financial difficulties for years, has not been able to find a way to monetize the collection while maintaining its public mission.

Miller Buckfire & Co, Detroit's restructuring investment bank, met with DIA officials in May to discuss the museum's options. At the same time, Miller Buckfire also reached out to Christie's about conducting a valuation.

Erickson said two Christie's officials had visited to the museum in June but had not returned since. The city said Christie's visited the DIA as part of its due diligence.

"They then informed us that they would be suspending their work," she said. "This is the first that we've heard that they've been resuming that work."

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UPDATE 3-Detroit retirees win seat at table in bankruptcy filing

Fri Aug 2, 2013 10:44pm EDT

By Nick Carey and Joseph Lichterman

DETROIT Aug 2 (Reuters) - In a high-stakes hearing on Friday in Detroit's bankruptcy filing, a judge approved a city plan to form a creditors' committee of retired workers, but gave unions and pension funds that opposed the plan a measure of satisfaction by declaring an independent trustee - and not the city - will select committee members.

Federal bankruptcy Judge Steve Rhodes' ruling on the city's effort to create a new negotiating partner independent of unions and pension funds was a key moment in a three-hour session that packed the largest courtroom in Detroit's downtown federal building. Rhodes also put off setting a date for a hearing on Detroit's eligibility to file for bankruptcy, while Detroit lawyers disclosed an ambitious aim to present a plan for reorganization by the end of 2013.

Detroit, whose course in bankruptcy court is being set by a state-appointed emergency manager, Kevyn Orr, set its target date at least three months earlier than the March 2014 deadline Rhodes previously had proposed.

Outside of court, Orr on Friday also proposed a new healthcare plan for city workers that would save Detroit $12 million annually by raising deductibles and trimming the number of available plans.

The next key step in the largest U.S. municipal bankruptcy case to date will be for the judge to set a trial date on whether Detroit is eligible for a Chapter 9 municipal bankruptcy. To remain in bankruptcy court, Detroit must prove it is insolvent and has negotiated in good faith with creditors owed more than $18 billion, or that there are too many creditors to make negotiating feasible.

Pension funds and unions representing city workers are expected to contest Detroit's eligibility.

An attorney for the city also disclosed Detroit is in regular but pointed dialogue with creditors even while in bankruptcy court. "There are significant differences that we feel will be difficult to breach," said David Heiman, an attorney who represents the city.

CONTENTIOUS COMMITTEE ISSUE

Detroit, a former manufacturing powerhouse and cradle of the U.S. automotive industry and Motown music, has struggled for decades as companies moved or closed, crime surged, and its population dwindled. The city's revenue fell short of spending, while city budgets and borrowing ballooned.

The city now says it can't afford to pay its retired workers the pensions and benefits they were promised. The committee that the trustee will select could help determine how much money and benefits the retirees may lose.

Unions argued the committee should include labor union representatives. They also asked the judge to adjust his proposed timetable for the case to allow the committee to become established and permit negotiation and mediation with the city.

U.S. Trustee Daniel McDermott will form the committee, though Judge Rhodes has the power to reject the committee's composition if it lacks adequate representation.

Brian O'Keefe, an attorney who represents associations of retired Detroit police, firefighters and city employees, said it was important the city not dictate the committee's composition.

"We were objecting to the fact that it seemed like the city wanted to be involved in the structuring of the committee and I think Judge Rhodes made it clear that it really will be up to the U.S. Trustee," said O'Keefe.

PENSION DISPUTE

The judge approved the city's offer to pay costs associated with the retiree committee's work. And Edward McNeil, the lead negotiator for a coalition of 33 of Detroit's 48 labor unions, told Reuters the union expects the city's funding to cover the cost of an independent actuarial study of the city's unfunded pension liability.

Orr, the city's emergency manager, contends the city faces $3.5 billion in unfunded liability, though the city prior to Orr's estimate in June had put the unfunded liability at $644 million for 2011. A larger unfunded liability could increase pressure on retirees and workers to make concessions to help Detroit fix its failed finances.

Estimates of pension valuations vary widely based on a number of factors, including return on investments and 30-year amortization of pension obligations. Rachel Barkley, a municipal credit analyst at Morningstar who studied the way Detroit calculated pensions valuations, said Detroit was within industry norms in its calculations.

"We feel an 8 percent investment return may not be conservative but definitely would be defensible by the city," she said.

BANKRUPTCY TIMELINE

Lawyers for some city unions argued Judge Rhodes' proposed schedule for the eligibility phase - at which the city must prove it belongs in bankruptcy - was too tight and left little time for discovery. Rhodes had proposed an Oct. 23 trial date.

"The whole schedule as a package is fairly aggressive," said Babette Ceccotti, a lawyer for the United Auto Workers, one of the city's unions.

Rhodes did not set a firm date for the eligibility trial and said he would consider concerns about scheduling and set an Aug. 21 date for the next hearing in the case.

During the hearing, Rhodes said he intends to appoint an examiner to review the fairness of fees charged by Detroit's lawyers and other service providers.

He gave the parties seven days to nominate candidates for the job. He also put off any action on a simmering debate over a deal Detroit struck with counterparties to interest-rate swap agreements that would save the city more than $70 million.

Detroit's target of filing a reorganization plan by year-end compares with the March 1 date proposed earlier this week by Rhodes. While the city would "enthusiastically accept" the judge's deadline, Heiman said, it wants to move faster.

"Our view is that time is our enemy," Heiman said. "The facts are not going to change no matter how long we wait. ... So we aim to file a plan by the end of the year."

The target date for Detroit's reorganization plan may prove tough to meet if recent municipal bankruptcies are any guide.

Stockton, California, took nearly a year just to prove its eligibility for Chapter 9 bankruptcy, and San Bernardino, California, is still awaiting a declaration more than a year after filing for protection.

Detroit's bankruptcy has drawn national attention at a time when many cities and states are dealing with budget deficits and pension crises.

St. Louis Federal Reserve President James Bullard, in remarks after speaking at a Boston conference Friday, warned bankruptcy will not be a quick fix.

"Declaring bankruptcy is no panacea," Bullard said. "It is not a solution. It is a mess."

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