EM Orr admits missteps on road to Detroit bankruptcy

Story originally appeared on DetroitNews.com.


Detroit— Kevyn Orr had a quick comeback recently when a disgruntled banker abruptly approached him at a New York City restaurant.

“We’re going to punish you,” Orr said the man told him, referring to Detroit’s increasingly hard line on banks and bondholders in its historic bankruptcy. A Tulsa Bankruptcy Lawyer is watching the case closely.

But the high-profile Washington, D.C., bankruptcy attorney responded with a story about life in the city he was tapped to run as emergency manager one year ago Friday.

Orr, 55, told the banker standing over his table about a little girl he saw on Seven Mile one evening in November, waiting for a bus ride home from school that would likely take her to a blighted neighborhood with broken streetlights.

“None of us would let our children live that way — and that is the life of the children in this city,” Orr, a father of two, recalled telling the speechless banker, whom he declined to identify.

In a wide-ranging interview this week with The Detroit News, Orr said the conversation speaks to the enormity of the task before him: fixing the finances of a city mired in poverty, crime, blight and a dwindling populace that can’t pay its bills while juggling demands from creditors that they be paid in full.

But Orr acknowledged for the first time that he miscalculated the willingness of Detroit’s creditors to take enormous losses for the good of the city’s future.

“How can you drive through the city and not see the needs?” Orr asked. “I’m still surprised. ... I should probably have been a little bit more skeptical about the ability of the stakeholders to see things the way I see things. Their prism is different than my prism.”

After 12 months at the helm during one the most tumultuous periods in Detroit’s 208-year history, Orr acknowledges he didn’t move fast enough last spring to tackle city services, such as outsourcing trash pickup to private firms.

Orr says he spent too much time analyzing the city’s finances — which teams of consultants had already done for then-Mayor Dave Bing — during the lead-up to his decision to take the city into bankruptcy in July.

“Looking back on it, I probably should have accepted what I was reading with more confidence,” said Orr, who is working for Gov. Rick Snyder under an appointment that will presumably end in September.
Dealing with opposition

After a year of living in the Book Cadillac hotel and flying home to see his family in Maryland on weekends, Orr is poised to deliver major changes to the way city government works — or doesn’t — for the 700,000 citizens of Michigan’s largest city.

Orr’s plan to shed billions of dollars in debt asks U.S. Bankruptcy Judge Steven Rhodes to approve what was once unthinkable in municipal bankruptcy: Reduce monthly pension checks to retirees and walk away from hundreds of millions of dollars owed on general obligation bonds that were used, in part, to mask annual budget deficits.

“We are going to receive violent opposition to our plan at a confirmation hearing by the creditor corps,” Orr said of opposition from bond insurers.

Orr’s proposed cures for city government — including a $1.5 billion, 10-year reinvestment plan — remain largely tied up in his bankruptcy reorganization plan that goes on trial this summer.

James Spiotto, a Chicago bankruptcy attorney and municipal financial adviser, said Orr made a misstep last summer by pushing the city’s pension funds and bondholders to accept as little as 10 cents for every dollar owed before he sought to generate support for fixing city services.

Orr wants to cut debt to free up cash to tear down abandoned homes, upgrade archaic city computer systems and buy trucks and equipment for police, fire and emergency services. But he should have focused on that before laying out devastating options for creditors, Spiotto said.

“I think he used more of a corporate bankruptcy approach than a municipal bankruptcy approach, where you need to bring buy-in,” Spiotto said. “Generally from past experiences, you start with a recovery plan and try to get buy-in. It’s sometimes a far better way than announcing a plan and telling people, ‘you’re going to get 10 cents on the dollar.’”

Orr admits he wrongly assumed the city’s creditors would be much more willing to reach agreements.

But he remains optimistic city retirees will accept a $815 million rescue package of state and private pledges to limit the reductions in future pensions for some 23,000 retirees and 10,000 current workers.

In exchange for settling now, police and firefighters would get a 4 percent cut in their monthly pensions and non-uniform general employees would get a 26 percent reduction — with no cost-of-living increases for at least a decade.

The deal on the table for retirees is far better than the 20 cents on the dollar Orr was offering the city’s pension funds last June. Orr said that’s a result of political, legal and judicial pressures the city faced to find a way to avoid a protracted court battle over pensions.

“We got pressure from a lot of fronts … and we listened to it,” Orr said.

'Public enemy No. 1'

Orr’s strategy for fast-tracking Detroit’s bankruptcy has faced setbacks in recent months. He acknowledges he’s a “little bit off schedule,” largely due to “push back” from the judge. Rhodes has twice rejected early settlements Orr hatched with two banks.

In a message that appeared aimed at Orr, Rhodes ruled from the bench Jan. 16 that he would not “perpetuate hasty and imprudent financial decision-making.”

“It just seems to me like this has not been a fun exercise for Kevyn Orr, and Judge Rhodes has not followed what people would have scripted to have been the playbook for this case,” said David Tawil, a New York hedge fund manager and former bankruptcy attorney who studied under Rhodes at the University of Michigan.

The city recently cut a third deal with UBS AG and Bank of America to settle a troubled pension debt for $85 million — about $145 million less than Orr originally agreed to last summer. Rhodes will consider the new deal at an April 3 hearing.

But the latest settlement came after Rhodes encouraged the city to bring him a lawsuit challenging the legality of the complex interest rate swaps debt. Orr said he made a legal calculation to settle the debt and avoid an expensive courtroom battle with the banks, while freeing up access to $15 million in monthly casino tax revenues that the banks have a lien on. The tax implications of the municipal bankruptcy is also being followed closely by a Tulsa Tax Lawyer.

But Orr’s preference to settle the debt continues to baffle some financial experts and inflames community activists who say it shows he’s more friendly with the banks than he publicly portrays.

“What’s hard to reconcile for a city that doesn’t have any money is that plaintiffs with good legal cases don’t typically write eight-figure checks to settle,” said Patrick O’Keefe, a Bloomfield Hills financial consultant.

Jerome Goldberg, an attorney representing a single city retiree, David Sole, said “it’s still an outrage” that Orr has declined to confront the banks in court.

“If you’re really serious about bringing the city back, let’s go after those who hurt the city,” Goldberg said.

But based on the vitriol being lobbed at him from Wall Street and the random banker in New York, Orr says “I don’t feel like a friend of the banks in any fashion.”

“Apparently I guess I’m on the walls of bathrooms or public enemy No. 1 over there (on Wall Street),” Orr said. “I’ve developed some callus at this point to criticism. But I’m still a little frustrated with folks who don’t realize the needs of the city.”

Bankruptcy for AMF Bowling

story first appeared in Wall Street Journal

AMF Bowling Worldwide Inc., the world's largest operator of bowling alleys, filed for bankruptcy-court protection Tuesday after being squeezed by a cash crunch and failing to find a buyer for its business.

The filing marks AMF's second trip through bankruptcy since 2001. The company, which employs 7,000 people, has struggled with both a heavy debt load and a shift in the sport.

The bowling industry has been in flux for decades. Once largely a blue-collar pastime dominated by leagues, it has shifted to a sport aimed at middle-class players, who seek amenities and attractive facilities and are generally averse to joining the teams that provide bowling alleys with steady income.

Tom Clark, the commissioner of the Professional Bowlers Association, said that even as the number of people bowling at least once a year is at a high of about 70 million, only about two million are competing regularly in leagues.

AMF, which sold off its bowling alleys overseas in a previous restructuring, operates 262 bowling centers in the U.S. Small chains and mom-and-pop operators now dominate the industry, which includes more than 5,000 bowling alleys.

AMF said that it would have upgraded its facilities to cater to today's bowlers, but the economic downturn reduced its revenue, thwarting its plans. The company does have nine bowling centers with lounges and modern décor, a response to competitors like Lucky Strike, a chain of upscale bowling centers with a dress code.

Facing what it called "unmanageable" debt levels, AMF began searching for a buyer last year. After an unsuccessful hunt, it instead began reaching out to creditors to discuss a restructuring.

The deal, which will be subject to bankruptcy-court approval, calls for AMF to exit Chapter 11 under the ownership of its senior lenders, subject to rival bids at a court-overseen auction. Either way, the lenders, which are owed more than $216 million, would see their claims paid in full.

AMF said it expects to emerge from bankruptcy protection within the next five months. Steve Satterwhite, AMF's chief financial officer and chief operating officer, said they'd be recapitalizing their balance sheet and reducing debt.

AMF, which said it hosts more than 20 million bowlers a year, said its financial troubles are tied to the bowling industry's shift to open play from leagues. It also attracted fewer bowlers during the economic downturn, which slashed revenue while the company's fixed costs remained high.

Tuesday's bankruptcy filing came about a week after AMF defaulted on its debt obligations, according to Standard & Poor's.To ensure its uninterrupted operations while it restructures, AMF won court approval Tuesday afternoon to tap $35 million of a $50 million bankruptcy loan from some of its existing senior lenders, a group led by Credit Suisse .

The Mechanicsville, Va., company reported assets and debts that were each in the range of $100 million to $500 million in its bankruptcy petition, which court papers show was filed with the U.S. Bankruptcy Court in Richmond, Va.

In 1996, Goldman Sachs Group Inc. led a $1.37 billion leveraged buyout of AMF from Richmond, Va., businessman William Goodwin. The firm went public in November 1997 but was delisted from the New York Stock Exchange three years later.

AMF first sought Chapter 11 protection in July 2001 to address declining revenue and its acquisition of 260 additional bowling centers, which the company said it struggled to manage. AMF emerged from bankruptcy protection the following year under the ownership of its secured lenders, though it quickly sought a new owner.

Chicago private-equity firm Code Hennessy & Simmons bought the bowling company in a $670 million deal and presided over what AMF called a "simplify and transform" strategy that involved shedding foreign assets and installing new management. According to the company, its financial results showed improvements between 2005 and 2008.

Steve Johnson, executive director of the Bowling Proprietors' Association of America, said the bowling industry has been making a comeback in recent years.