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REUTERS

Bond insurer Syncora is stubborn rival in Detroit's bankruptcy

June 26, 2014 - 3:00pm


(Reuters) — Bond insurer Syncora Guarantee Inc. has emerged as Detroit's chief nemesis in the city's historic bankruptcy case and is fighting as if its financial life depends on a decent recovery on its $400 million exposure to the city.

Since Detroit filed the biggest municipal bankruptcy in U.S. history last July, Syncora has objected to the city's moves nearly every step of the way — from an early agreement with investment banks over interest rate swaps to the more recent "grand bargain" designed to save the Detroit Institute of Arts.

The company's latest pleading, set for argument Thursday in a federal courtroom, demands information on the current assets and income of all Detroit's retired workers — some 20,000 of them.

Syncora has issued past warnings to investors that it might go out of business, and it cautioned in a recent financial report that investment in Syncora Holdings common shares is "likely to result in a loss of substantially all of their investment."

In the financial statement, Syncora warned of a "liquidity mismatch" in which claims might exceed recoveries from the claims, and noted that reserves for losses "are modest" when compared with estimated future claims.

With so much at stake, Syncora has filed a steady stream of objections to Detroit emergency manager Kevyn Orr's carefully synchronized effort to emerge from bankruptcy this fall.

The bond insurer has raised questions about the bankruptcy court's conduct. It has sent subpoenas to Michigan Attorney General Bill Schuette; Roger Penske, chief executive of Penske Automotive Group Inc., and Daniel Gilbert, the co-founder of Detroit-based Quicken Loans.

It also has objected to the "grand bargain" in which philanthropic foundations and the state of Michigan have pledged millions of dollars to ease pension cuts on city retirees and protect parts of the Detroit Institute of Arts' collection from being sold.

Judge Steven Rhodes, who is overseeing the Detroit bankruptcy case, will hear motions to block several Syncora demands, including the request for retirees' financial information.

"The only possible explanation for this outrageous request is that Syncora is attempting to gain a litigation advantage by harassing, oppressing and embarrassing the city and its retirees," the city stated in its motion urging the judge to deny Syncora's demand.

James H.M. Sprayregen, a partner at Kirkland & Ellis L.L.P. who represents Syncora, said Syncora's request is reasonable given the city is citing the greater economic harm to retirees versus financial creditors for justifying the disparate treatment of those creditor groups. He added that Detroit's plan will not win confirmation from Judge Rhodes because it does not meet a standard under Chapter 9 bankruptcy law that all similarly situated creditors must be treated fairly.

"We think (Detroit) proposed a patently unconfirmable plan," Mr. Sprayregen said.

In a filing Monday, Syncora accused Detroit of playing politics in its bankruptcy case.

"Chapter 9 bankruptcies are a tempting place to break out the torches and pitchforks and pursue the city's lenders through the streets," Syncora's filing said. "It is a time-honored and politically-popular approach. But the bankruptcy code deplores — and forbids — a city from favoring one class while showing animus and unfairness to another."

Syncora's beef with Detroit centers on the company's insurance policy on some of the city's $1.4 billion of taxable city pension debt, as well as swaps deals Detroit used to hedge interest-rate risk. Guarantees offered by XL Capital Assurance, Syncora's predecessor company, enabled Detroit to sell its debt with a stellar triple-A-rating to investors, including European banks.

When Detroit defaulted on the debt in June 2013, it left Syncora and another insurer, Financial Guaranty Insurance Co., to pay bondholders. Syncora and FGIC both have seen their financial conditions crumble since the 2008 financial crisis.

Like other bond insurers, Syncora had exposure to mortgage-backed securities, a market that collapsed. Standard & Poor's Corp. in 2010 stopped rating the company and Moody's Investors Service Inc. followed suit in 2012.

In addition to Detroit, Syncora in its financial filings lists "significant exposure" to Puerto Rico, an ailing muni issuer, and Syncora also insured some debt issued by Jefferson County, Alabama — the biggest-ever Chapter 9 case prior to Detroit's.

Regulators in 24 states have yanked Syncora's license to insure debt, and the last time Syncora insured new muni debt was in 2008, according to Thomson Reuters data.

Mr. Sprayregen said Syncora is facing a near-total loss on its Detroit exposure, a circumstance that motivates its hard fight.

"Our recovery is virtually nothing, so anybody who portrays what we're doing as irrational isn't really understanding the situation," Mr. Sprayregen said. "If you're offered nothing, what choice do you have but to object?"

Stephen Selbst, a bankruptcy attorney with Herrick, Feinstein L.L.P. in New York, said Syncora may be seeking to maneuver Detroit toward settlement.

"If you're a holdout creditor, doing everything you can to make everyone else miserable is an old-fashioned strategy, and the core of that is make it so uncomfortable for the debtor that they want to come to the table and settle," he said.

 



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