CORRECTED-Tier 2 costs to rise as investors reassess CoCo risk

Fri Aug 9, 2013 12:00pm EDT

(Corrects spelling of investor name in paragraph eight)

* 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 Montague, 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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UPDATE 2-Harbinger sues Deere and GPS companies for $1.9 bln in damages

Fri Aug 9, 2013 5:21pm EDT

NEW YORK Aug 9 (Reuters) - Philip Falcone's Harbinger Capital on Friday sued agricultural equipment maker Deere & Co and Global Positioning System companies and groups for damages of $1.9 billion as it looks to recoup its investment in bankrupt wireless company LightSquared.

The lawsuit's defendants, who include GPS companies Garmin International and Trimble Navigation Ltd, had opposed LightSquared's plans to build a wireless network because of concerns it would interfere with GPS systems, which are used in everything from farming to airline navigation.

Other defendants include industry groups the U.S. GPS Industry Council and the Coalition to Save Our GPS.

Harbinger, which has spent billions of dollars on LightSquared, said in a complaint filed on Friday that it never would have made the investments if the GPS industry had disclosed potential interference problems between the LightSquared spectrum and GPS equipment between 2002 and 2009.

The hedge fund accused the defendants of fraud and negligent misrepresentation among other allegations, saying the defendants "knew years ago" all the material facts on which they based their opposition to the LightSquared network.

Trimble general counsel Jim Kirkland said the company would defend itself against the lawsuit he said was without merit. He disputed a Harbinger's assertion that the interference resulted from a problem with the design of GPS devices.

"This interference resulted from the characteristics of LightSquared's new plan for use of satellite spectrum, not the design of GPS devices. The responsibility for Harbinger's losses rests squarely with Harbinger," Kirkland said in an email.

Deere declined to comment on the case. Garmin was not immediately available for comment.

Falcone, once one of the hedge fund industry's most powerful figures, risked the future of Harbinger on a 96 percent ownership of LightSquared, in a bet that it would be able to become a new competitor to the U.S. wireless market.

But LightSquared had to file for bankruptcy protection in May 2012 after the U.S. Federal Communications Commission revoked permission to build out a new high-speed wireless network after tests showed that its network would interfere with GPS systems.

Falcone has also had legal problems himself. The U.S. Securities and Exchange Commission last year charged Falcone with market manipulation and other violations. In July the SEC voted to reject a deal its enforcement division had struck with Falcone without explaining its decision.

Harbinger filed the lawsuit on Friday in the U.S. District Court in Manhattan. Garmin International is a subsidiary of Garmin Ltd.

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Madoff was in 'love triangle' with employee - U.S. prosecutors

By Nate Raymond

NEW YORK | Fri Aug 9, 2013 6:17pm EDT

NEW YORK Aug 9 (Reuters) - Bernard Madoff was in a "love triangle" involving one of five former employees who are about to go on trial for helping him run his multibillion-dollar Ponzi scheme, prosecutors said.

Madoff pleaded guilty in March 2009 to running a fraud of up to $65 billion at his investment firm and is serving a 150-year prison sentence.

While Madoff said he acted alone, prosecutors have since charged 13 individuals in connection with the fraud. Five of them - two women and three men - are set to go on trial in federal court in New York on Oct. 7.

In a filing with the court on Thursday, prosecutors said the married Madoff was involved with one of the five but did not give a name.

All but one of the defendants were at one time involved in relationships with each other, and one had a relationship with Madoff, the prosecutors said.

"For example, one of the defendants was in a love triangle with Bernard Madoff himself," prosecutors said.

In the filing, the office of Preet Bharara, the U.S. attorney for Manhattan, said prosecutors had gathered "inflammatory" evidence of romantic and sexual relationships between employees and customers, including between defendants and witnesses in the upcoming trial.

If the judge finds evidence of past relationships are admissible, defendants and witnesses should be prepared for details to be elicited during the government's case, the motion said.

A former lawyer for Madoff declined to comment.

Eric Breslin, a lawyer for former investment advisory employee Joann Crupi, said he didn't know which defendant was in the purported "love triangle."

"It's just kind of strange," Breslin said of the filing.

Besides Crupi, the defendants include former operations manager Daniel Bonventre, former investment advisory employee Annette Bongiorno, and former computer programmers Jerome O'Hara and George Perez.

Lawyers for the other defendants either did not respond to requests for comment or declined to comment. A spokeswoman for Bharara did not immediately respond to a request for comment.

At a hearing on Friday, Judge Laura Taylor Swain denied a request by lawyers for the five former employees to delay the trial for two months because of a new indictment filed by prosecutors last week.

The case is USA v. O'Hara et al, U.S. District Court for the Southern District of New York, No. 10-0228.

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CORRECTED-Tier 2 costs to rise as investors reassess CoCo risk

Fri Aug 9, 2013 12:00pm EDT

(Corrects spelling of investor name in paragraph eight)

* 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 Montague, 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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UPDATE 2-Harbinger sues Deere and GPS companies for $1.9 bln in damages

Fri Aug 9, 2013 5:21pm EDT

NEW YORK Aug 9 (Reuters) - Philip Falcone's Harbinger Capital on Friday sued agricultural equipment maker Deere & Co and Global Positioning System companies and groups for damages of $1.9 billion as it looks to recoup its investment in bankrupt wireless company LightSquared.

The lawsuit's defendants, who include GPS companies Garmin International and Trimble Navigation Ltd, had opposed LightSquared's plans to build a wireless network because of concerns it would interfere with GPS systems, which are used in everything from farming to airline navigation.

Other defendants include industry groups the U.S. GPS Industry Council and the Coalition to Save Our GPS.

Harbinger, which has spent billions of dollars on LightSquared, said in a complaint filed on Friday that it never would have made the investments if the GPS industry had disclosed potential interference problems between the LightSquared spectrum and GPS equipment between 2002 and 2009.

The hedge fund accused the defendants of fraud and negligent misrepresentation among other allegations, saying the defendants "knew years ago" all the material facts on which they based their opposition to the LightSquared network.

Trimble general counsel Jim Kirkland said the company would defend itself against the lawsuit he said was without merit. He disputed a Harbinger's assertion that the interference resulted from a problem with the design of GPS devices.

"This interference resulted from the characteristics of LightSquared's new plan for use of satellite spectrum, not the design of GPS devices. The responsibility for Harbinger's losses rests squarely with Harbinger," Kirkland said in an email.

Deere declined to comment on the case. Garmin was not immediately available for comment.

Falcone, once one of the hedge fund industry's most powerful figures, risked the future of Harbinger on a 96 percent ownership of LightSquared, in a bet that it would be able to become a new competitor to the U.S. wireless market.

But LightSquared had to file for bankruptcy protection in May 2012 after the U.S. Federal Communications Commission revoked permission to build out a new high-speed wireless network after tests showed that its network would interfere with GPS systems.

Falcone has also had legal problems himself. The U.S. Securities and Exchange Commission last year charged Falcone with market manipulation and other violations. In July the SEC voted to reject a deal its enforcement division had struck with Falcone without explaining its decision.

Harbinger filed the lawsuit on Friday in the U.S. District Court in Manhattan. Garmin International is a subsidiary of Garmin Ltd.

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Madoff was in 'love triangle' with employee - U.S. prosecutors

By Nate Raymond

NEW YORK | Fri Aug 9, 2013 6:17pm EDT

NEW YORK Aug 9 (Reuters) - Bernard Madoff was in a "love triangle" involving one of five former employees who are about to go on trial for helping him run his multibillion-dollar Ponzi scheme, prosecutors said.

Madoff pleaded guilty in March 2009 to running a fraud of up to $65 billion at his investment firm and is serving a 150-year prison sentence.

While Madoff said he acted alone, prosecutors have since charged 13 individuals in connection with the fraud. Five of them - two women and three men - are set to go on trial in federal court in New York on Oct. 7.

In a filing with the court on Thursday, prosecutors said the married Madoff was involved with one of the five but did not give a name.

All but one of the defendants were at one time involved in relationships with each other, and one had a relationship with Madoff, the prosecutors said.

"For example, one of the defendants was in a love triangle with Bernard Madoff himself," prosecutors said.

In the filing, the office of Preet Bharara, the U.S. attorney for Manhattan, said prosecutors had gathered "inflammatory" evidence of romantic and sexual relationships between employees and customers, including between defendants and witnesses in the upcoming trial.

If the judge finds evidence of past relationships are admissible, defendants and witnesses should be prepared for details to be elicited during the government's case, the motion said.

A former lawyer for Madoff declined to comment.

Eric Breslin, a lawyer for former investment advisory employee Joann Crupi, said he didn't know which defendant was in the purported "love triangle."

"It's just kind of strange," Breslin said of the filing.

Besides Crupi, the defendants include former operations manager Daniel Bonventre, former investment advisory employee Annette Bongiorno, and former computer programmers Jerome O'Hara and George Perez.

Lawyers for the other defendants either did not respond to requests for comment or declined to comment. A spokeswoman for Bharara did not immediately respond to a request for comment.

At a hearing on Friday, Judge Laura Taylor Swain denied a request by lawyers for the five former employees to delay the trial for two months because of a new indictment filed by prosecutors last week.

The case is USA v. O'Hara et al, U.S. District Court for the Southern District of New York, No. 10-0228.

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UPDATE 1-Railway in Quebec disaster gets Canada bankruptcy protection

Thu Aug 8, 2013 6:23pm EDT

By Leila Lemghalef and Dave Sherwood

MONTREAL/BANGOR Aug 8 (Reuters) - The U.S. railway whose runaway train killed 47 people in a tiny Quebec town last month was granted bankruptcy protection from a Canadian court on Thursday and took steps in that direction in a U.S. court as well.

Montreal Maine & Atlantic railroad filed for protection in both countries on Wednesday, saying its revenues had deteriorated since the July 6 crash and it could not afford to pay its mushrooming financial obligations.

The company's runaway crude oil train derailed in the small lakeside town of Lac-Megantic, Quebec, exploding in huge fireballs that destroyed a swathe of the town's core. About 5.6 million liters of crude oil were spilled, and MMA estimated the cleanup costs would exceed C$200 million.

Quebec Superior Court Judge Martin Castonguay called the company's behavior "deplorable" and said he was not impressed by its management.

"This decision is to prevent legal anarchy," Castonguay told the courtroom after approving the bankruptcy protection for MMA's Canadian unit.

Also on Thursday, a U.S. federal judge in Maine ordered the appointment of a federal trustee to oversee MMA's bankruptcy proceedings and help ensure that the railroad remains in operation so that service continues for local companies.

Thursday's decision allows the railway to continue to operate and meet its payroll obligations through Aug. 22, when another hearing will be held.

The judge in Maine questioned whether the company could remain afloat without its approximately $1 million a month crude oil transport business.

Despite MMA's decision to stop shipping crude after the crash, company lawyer Roger Clement assured Judge Louis Kornreich that the business would remain viable.

"The railroad had a very healthy business before the hauling of crude oil started about 18 months ago. We're very hopeful that it can bring its revenues back up," he said.

After the hearing, Clement told reporters that he thought the sale of MMA's assets to another company interested in shipping crude between Montreal and Saint John, New Brunswick - the line's eastern terminus and home to Irving Oil's refinery - was a "distinct possibility."

"I expect there will be a lot of interest from other rail operators in purchasing the lines of Montreal, Maine and Atlantic. There's no other route that's as direct," he said.

The bankruptcy filing sparked anger in Lac-Megantic, where residents fear victims' families may not get the compensation they are seeking through class-action and individual suits against the company in U.S. and Canadian courts.

The governments of Quebec and the town of Lac-Megantic have demanded MMA foot the cleanup bill, which already amounts to C$7.8 million ($7.6 million).

Quebec Health Minister Rejean Hebert said the provincial government was seeking status in the bankruptcy case as a secured creditor, which would assure it would receive payment from MMA before some other claimants.

The U.S. government and Canada's federal and provincial government are the company's biggest secured or potential secured creditors.

Hebert said the Quebec government would take priority over the U.S. government on claims against MMA's Canadian unit.

MMA's Canadian petition said insurance covered liabilities up to C$25 million, far too little to cover damages.

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PRESS DIGEST-New York Times business news - Aug 9

Fri Aug 9, 2013 2:16am EDT

Aug 9 (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.

* Two weeks after Detroit declared bankruptcy, cities, counties and other local governments in Michigan are getting a cold shoulder in the municipal bond market. Borrowing costs are up around the state, in some cases drastically. On Thursday, Saginaw County became the latest casualty when it said it was delaying a $60 million bond sale planned for Friday. ()

* JPMorgan Chase & Co is close to a deal with regulators over whether it gave lowball estimates for trading losses despite evidence within the bank that the bet was spiraling out of control. The losses, which have now swelled to more than $6 billion, stemmed from outsize derivatives wagers made by traders at JPMorgan's chief investment office in London. ()

* BHP Billiton PLC, the world's largest mining company in a sector that is deeply out of favor with investors, is aggressively curtailing its spending in hopes of winning them over. Investors' central complaint is that big companies, during a period of high metals prices and strong profit from 2009 to 2011, spent too much money building mines instead of returning money to shareholders. ()

* Hervé Falciani is a professed whistle-blower, the Edward Snowden of banking, who has been hunted by Swiss investigators, jailed by Spaniards and claims to have been kidnapped by Israeli Mossad agents eager for a glimpse of the client data he stole while working for a major financial institution in Geneva. Once dismissed by many European authorities, he and other whistle-blowers are now being courted as the region's governments struggle to fill their coffers and to stem a populist uprising against tax evasion and corruption. ()

* On Friday the federal International Trade Commission is expected to say whether it will uphold a preliminary finding that Samsung Electronics Co Ltd mobile products violated a handful of Apple Inc's patents. A decision against Samsung by the commission could result in an import ban on some of the company's mobile devices. A decision for Apple would be its second major legal win against Samsung in less than a week. ()

* Carl Icahn is suing Dell's board over its latest decision to accept a higher buyout offer from Michael Dell in exchange for modifying the rules governing the vote for the deal. On Monday, a hearing will take place in the Delaware Court of Chancery on whether to expedite Icahn's suit. ()

* Britain's Serious Fraud Office faced renewed embarrassment on Thursday after it admitted it had lost thousands of documents linked to an investigation into the British aerospace giant BAE Systems PLC. The agency has been trying to rejuvenate its reputation under its new leader, David Green. ()

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COMMENT: Moody's takes hard line on junk hybrid issuers

By Natalie Harrison

Fri Aug 9, 2013 5:24am EDT

LONDON, Aug 9 (IFR) - Moody's new binary approach to rating hybrids issued by speculative-grade corporates ignores two fundamental points: the risk of a default does not suddenly soar the minute a company slips into junk status, and Europe is very different to the US in terms of bankruptcy laws.

Moody's said last week that a hybrid issued by a company rated Ba1 or below will now be treated as either pure debt or pure equity, discarding its previous approach where it used five baskets (A to E) to give instruments equity credit ranging from zero to 100%.

Preference shares and long-dated shareholder loans - which have debt form but equity characteristics - will get equity treatment, while everything else is treated as debt.

Moody's said the reason for the change reflected its view that speculative-grade non-financial companies are materially closer to default, have shorter-dated and more complex capital structures, and carry debt with more covenants.

Although all of that is true, the correlation between lower credit quality and default risk is not linear, and only really spikes once ratings reach Single B, or even Triple C territory.

The rating agency's data show that European five-year cumulative default rates from 1985 to 2012 were 1.9% for A rated entities, 1.7% for Baa, 5.8% for Ba (the highest rating category for junk) and then jumping to 20.8% for Single Bs and again to 45.2% for Triple Cs.

The changes also do not take into account the wide range of default risk across industry sectors. The one-year default rate forecasts stand at 8.9% in Europe for media, and just 1.5% for telecoms, according to data published by Moody's in June.

During the first quarter of 2013, eight defaults were recorded in media of which four were from one corporate family - Dex One Corporation.

One hybrid structuring specialist was critical of what he perceived as a delineation between investment-grade and non-investment-grade issuers.

"We find it quite difficult to reconcile how a basket C instrument can go automatically to A basket if an issuer loses its IG rating, simply because of the instrument's claim in bankruptcy and not taking into account the other loss-absorbing or equity-like features such as coupon deferral," said AJ Davidson, head of hybrid capital and balance sheet solutions for EMEA and Asia-Pacific at RBS.

U.S.-CENTRIC

At the very least, the changes will force investment-grade issuers to go back to the drawing board in order to structure any potential hybrids that had been in the works to try to obtain the full 100% equity credit.

"I don't think this change stops issuers accessing the market. If anything, it might make sub-IG issuers consider a hybrid more cost-effective than issuing equity, if the market is there for them," said Davidson.

But it is a harsh approach, especially for companies on the cusp of junk ratings.

Telecom Italia's Baa3 senior unsecured and Ba2 subordinated ratings were put on review for downgrade by Moody's late on Thursday. That signals that it may be junked within the next three months, piling even more refinancing pressure on the company that has some EUR28bn of bonds outstanding.

TI is rated BBB- with a stable outlook by S&P, while Fitch cut its rating to BBB- with a negative outlook on Monday.

If it doesn't manage to avoid a downgrade by Moody's, which several analysts now see as a foregone conclusion, its outstanding hybrid issued in March will lose its 50% equity credit and leave the company saddled with even more expensive debt.

The other weak link in Moody's methodology is its US-centric approach.

Unlike the US, Europe has messy and inconsistent bankruptcy laws, and the notion of a debt claim or equity claim isn't as clear cut as across the pond. Recovery rates are more uncertain.

This will require hybrid structurers to look at the relevant legal jurisdictions to determine what would qualify as a debt or an equity claim. Moody's would then need to be convinced.

"In most cases, we think a legal opinion should suffice, similar to legal opinions Moody's sought in regards to preferred share subordination rankings in investment grade C basket hybrids post the 2010 criteria change," Davidson said. (Reporting by Natalie Harrison, IFR Markets; Editing by Alex Chambers, Marc Carnegie and Luzette Strauss)

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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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