* Restructuring proposed for unlimited tax GO bonds-source
* Debt overhaul to provide more liquidity to the city-source
* Orr suggests 'haircuts' still on agenda
By Edward Krudy and Deepa Seetharaman
DETROIT/NEW YORK, Aug 7 (Reuters) - Detroit's creditors are trying persuade the city's emergency manager to restructure some of their debt to avoid taking heavy losses on their bond holdings, a person familiar with the negotiations said on Wednesday.
Emergency Manager Kevyn Orr told Reuters in an interview on Wednesday that such a proposal may be at odds with his priority to leave Detroit on firmer footing than when he took control, suggesting write-downs for investors were an inevitable part of bankruptcy.
The creditors have offered to refinance Detroit's unlimited tax general obligation bonds, the source said, in a move that would stretch the length of the debt and avoid big upfront losses for bondholders.
Such bonds have long been considered the safest kind of municipal debt. Many experts believe Orr's treatment of the debt could reshape the landscape of the municipal bond market after Detroit last month filed for Chapter 9 bankruptcy protection.
The source said a refinancing deal for the unlimited GO bonds would mean Detroit would not be shut out of credit markets to finance future borrowing needs and provide the city with much-needed cash.
The source talked on condition of anonymity because the negotiations are confidential.
Responding to a question about such a proposal, Orr said he was reluctant to leave the city with a debt load that would not put Detroit on a sustainable financial path.
"Who wants a 70-year mortgage?," Orr said.
"Saddling the city with decades of potential payments may not comport with our concepts of what's sustainable," Orr said, declining to comment on any specific discussions.
MOST UNSECURED DEBT GETS CUT -ORR
Avoiding losses in the city's unlimited tax obligation debt would help reassure investors Detroit is not steam rolling over its commitment to bondholders, said James Spiotto, a bankruptcy lawyer at Chapman and Cutler.
The bonds carry a voter-approved guarantee to levy taxes without limitation to meet the debt obligation.
"If they default on the normal GOs it's an unfortunate situation," said Spiotto. "But it shouldn't have the contagion effect that the unlimited tax GOs would, because that was perceived as being protected."
City officials have been in talks with creditors over how to tackle at least $18.5 billion in debt and unfunded liabilities the city reported in its bankruptcy petition last month. Orr, who has been emergency manager since March, classifies about $11.5 billion of that debt as unsecured, including most GO bonds and unfunded retiree pension and healthcare obligations.
The city has $369 million of unlimited GO which are considered unsecured by Orr.
"Our perception is most unsecured debt in bankruptcies gets a haircut. That's just what happens," Orr said.
The decision to classify GO bondholders as unsecured creditors, especially holders of unlimited tax GO bonds, has been a source of friction in the largest municipal bankruptcy in U.S. history.
Orr said his focus is on repairing Detroit's finances, but he has heard a lot of concern about the ramifications of the city's policy on the GO bond market.
He added that other lenders have indicated to his team that when Detroit overhauls its finances and becomes credit worthy, the city's access to credit markets may open up.
"That's a calculated risk," Orr said, of the city's approach to putting itself on firmer financial ground.
"We're not deaf to the concerns but frankly the numbers are so extreme that it doesn't give us a whole lot of elasticity," he added. "It's not like we have choices."
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