DETROIT Aug 28 Cash-strapped Detroit can continue to access an estimated $11 million a month in casino tax revenue, a U.S. bankruptcy judge ruled on Wednesday, while the court takes up a deal with creditors related to the revenue.
U.S. Bankruptcy Judge Steven Rhodes, who is overseeing Detroit's bankruptcy petition, ruled that bond insurer Syncora Guarantee Inc cannot block the city from using taxes paid by the city's three casinos.
Rhodes said Syncora does not have a lien on the money used as collateral since 2009 to secure Detroit's obligations on interest-rate swap agreements. Detroit entered into those agreements in conjunction with the sale of pension debt for its two retirement funds.
Sinking under more than $18 billion in debt and other obligations, Detroit on July 18 filed for the biggest Chapter 9 municipal bankruptcy in U.S. history. Many bankruptcy experts believe the case may be a guide for what could happen when other U.S. cities file for Chapter 9 protection.
Detroit collects about $180 million annually from casinos, and around $15 million is deposited each month into accounts overseen by U.S. Bank to meet collateral requirements. The bank sets aside $4 million a month for quarterly payments to swap counterparties, leaving the city with about $11 million.
Syncora, which insured the swaps and some Detroit pension debt associated with the swaps, wanted to stop the city from accessing the casino revenue. That led Detroit to sue Syncora, claiming the insurer's action could derail an agreement in principle over the swaps. Rhodes put that lawsuit and other litigation on hold.
Detroit has asked Rhodes to approve a deal that could terminate the swaps, which were used to hedge interest-rate exposure on some of the pension debt, at a discounted rate of as much as 25 percent, saving the city more than $70 million. Monthly payments to swap counterparties from casino revenue would end if the swaps are terminated.
The deal, involving UBS AG and Merrill Lynch Capital Services, is the only one with creditors that has been publicly disclosed by Kevyn Orr, the state-appointed emergency manager running Detroit since March.
Syncora, other bond insurers, some owners of the pension debt, Detroit labor unions and others have filed various objections in court to the deal. The judge has ordered parties involved in the deal and many of the objectors to attend a mediation session scheduled for Thursday.
Ambac Assurance Corp, which insures about $170 million of Detroit general obligation bonds, said in its court filing the deal "cannot be deemed to be fair and equitable vis-à-vis the city's other creditors, because the city is overpaying one set of creditors at the expense of other similarly situated creditors."
In June, Orr determined the $1.4 billion of pension debt sold in 2005 and 2006 was unsecured and allowed a payment default, forcing Syncora to make a $24.7 million payment to bondholders. Orr, however, deemed the $300 million owed to swap counterparties was secured.
A hearing into the swaps agreement initially set for Sept. 9 was pushed back on Wednesday by Rhodes to Sept. 23 to allow attorneys for the multiple parties involved more time to prepare.
DIGITAL 'DATA ROOM'
Rhodes on Wednesday also allowed Detroit's legions of creditors access to critical financial data without having to agree not to disclose the information.
Some creditors, including a union representing city workers, had balked at being required to sign nondisclosure agreements in order to view 70,000 pages of financial information in a digital "data room."
Rhodes agreed to the city's plan to redact personal information such as Social Security numbers and home addresses from the documents. The data room would not be open to the public or news media.