Deal of the month: Detroit bankruptcy

Author: Zoe Thomas | Published: 9 Dec 2014
As IFLR goes to press, Detroit – the biggest US city to declare insolvency – is set to exit bankruptcy

As a municipality with obligations to its residents, the situation has a striking resemblance to several not-so-distant sovereign debt crises. This, combined with the final agreements falling under traditional US bankruptcy laws, necessitated a careful balance of stakeholder interests.

With over $18 billion in debt, the city officially began bankruptcy proceedings in July 2013. It cut $7 billion of that debt through a plan of adjustment that allowed the city to restructure not only its bonds, but also city pension obligations.

The massive and often contentious process raised several unprecedented issues, including the city's obligation to pensioners under Michigan's state constitution. In the end, the proceedings were aided by Chapter 9 of the US Bankruptcy Code, which is designed for municipalities. The rarely-used chapter enabled the city to settle its obligation in...