Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Business Briefing

By the rivers of Babylon: Glory days gone, Detroit faces legal 'war' Add to ...

These are stories Report on Business is following Monday, July 22, 2013.

Follow Michael Babad and The Globe's Business Briefing on Twitter.

Detroit a mess
Like a modern day Babylon, Detroit was once a symbol of America’s postwar might, the seat of industry, the heart and soul of organized labour.

Now a symbol of decay, the question is what it will take to save it.

This is a landmark case, one that will set a standard. As Detroit Mayor Dave Bing noted yesterday, more than 100 American cities are in trouble, which is why all eyes are on the Motor City.

“We may be one of the first,” Mr. Bing told ABC. “We are the largest. But we absolutely will not be the last. And so we have got to set a benchmark in terms of how to fix our cities.”

It’s going to be a long road ahead for politicians and lawyers who will be fighting over everything from municipal services to pensions in a city with $18-billion (U.S.) in obligations, whose collapse since its heights in the 1950s was the result of an exodus of its people, mismanagement, neglect, and, according to the emergency manager, corruption.

The emergency manager, Kevyn Orr, wants it done by next fall, but that seems a long shot. It’s the equivalent of a corporate restructuring, but far more complex.

Already, its Chapter 9 bankruptcy filing is a mess. On Friday, one day after the Motor City collapsed, a state judge agreed with those fighting the filing, ruling that it should be withdrawn.

Michigan, which authorized the move, is appealing, posing the first issue for Steven Rhodes, the U.S. bankruptcy judge who’s overseeing the biggest municipal bankruptcy in U.S. history.

Creditors, pension funds, unions and others are lined up to fight the city, represented by the Jones Day legal firm, with help from Ernst & Young and others.

Everything is on the table, at least as the creditors see it. Just as an example, they want the impressive collection of the Detroit Institute of Arts to be deemed assets that can be sold.

As for the creditors, who face substantial haircuts, Michigan Governor Rick Snyder fired a warning shot over the weekend.

“Realistically, if you step back, if you were lending to the city of Detroit in the last few years, didn’t you understand there were major issues and problems?” he told CBC.

The pension issue is a huge one, which is why the unions and the funds are on high alert.

“And Detroit is only the opening act even if its problems are unique to a city in secular decline and dilapidation (35 per cent of its residents are on food stamps, the population is down some 2/3 since the city’s peak as an industrial powerhouse in 1960,” said chief economist David Rosenberg of Gluskin Sheff + Associates.

“Chicago is the next culprit, underlined by its huge credit rating downgrade last week (three notches to A3 due to, surprise, surprise, ‘very large and growing pension liabilities'). Not to mention various municipalities in California.”

In an interview with the Detroit Free Press, the chief of Detroit’s Police and Fire Retirement System summed it up well as the various parties prepare to head to court for the first battle: “Welcome to war.”

Apple takes down developer site
Apple Inc. has taken down its developer site after an attempt by a hacker to breach it.

Apple stressed in a statement on the site that “sensitive” information could not have been stolen, but some information may have been.

“Last Thursday, an intruder attempted to secure personal information of our registered developers from our developer website,” the tech giant said.

“Sensitive personal information was encrypted and cannot be accessed, however we have not been able to rule out the possibility that some developers’ names, mailing addresses, and/or email addresses may have been accessed,” said Apple, which reports earnings tomorrow.

“In the spirit of transparency, we want to inform you of the issue. We took the site down immediately on Thursday and have been working around the clock since then.”

Apple said it is “completely overhauling” its systems.

Intact to book losses
Intact Financial Corp. says it will book $257-million of catastrophe losses as a result of several recent freak storms, floods and the deadly Lac-Mégantic oil train crash.

Toronto-based Intact, which bills itself as Canada’s largest provider of property and casualty insurance, says it plans to record after-tax losses of $123-million or 92 cents per share, net of reinsurance, in its second-quarter results, out July 31, The Globe and Mail's Bertrand Marotte reports.

The company said it also expects to book a further $134-million after-tax or $1.01 per share, net of reinsurance, in the third quarter.

The losses are related to damages resulting from the Alberta flooding, Lac-Mégantic derailment, severe rain storm in the Greater Toronto Area and early July hail storms.

McDonald's sees challenges
McDonald’s Corp. today warned of challenges in the fast-food market as its quarterly results disappointed investors.

The burger chain posted a jump in profit to $1.4-billion (U.S.) or $1.38 a share from $1.35-billion or $1.32 a year earlier, while revenue rose to $7.1-billion from $6.9-billion.

“While the informal eating out market remains challenging and economic uncertainty is pressuring consumer spending, we're continuing to differentiate the McDonald's experience by uniting consumer insights, innovation and execution,” said chief executive officer Don Thompson.

Mr. Thompson projected that same store sales would be flat in July and that “our results for the remainder of the year are expected to remain challenged.”

Maple Leaf, Domtar in deals
A couple of corporate deals to note today: Maple Leaf Foods Inc. is selling its turkey operations, and Domtar Corp. its U.S. Ariva unit.

Maple Leaf announced deals to sell its commercial turkey farms to Ernald Enterprises Ltd., while its breeder farms and hatchery operations go to Cuddy Farms Ltd.

No financial details were disclosed. Among the provisions is a long-term supply commitment from Ernald.

“The transaction ensures a long-term supply of high quality turkeys at competitive prices,” said chief executive officer Michael McCain.

Domtar, in turn, is selling its U.S. Ariva unit to a division of Central National-Gottesman, which in turn will sell the Midwest part of that business to The Millcraft Paper Co.

The Canadian operations of Ariva will be folded into Domtar’s pulp and paper operations.

Duchess in labour
A nod to the old and the new today.

Buckingham Palace plans to announce the birth of the royal baby with a proclamation posted on a board in the palace yard. But … it’s also going to tweet the news.

Streetwise (for subscribers)

ROB Insight (for subscribers)

Business ticker

 

In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular