DETROIT Jan 16 (Reuters) - A U.S. bankruptcy judge on Thursday rejected a deal for Detroit to end costly interest-rate swap agreements with two investment banks, potentially eliminating a source of cash for the bankrupt city.
Ending the swaps with UBS AG and Bank of America Corp's Merrill Lynch Capital Services for $165 million - a 43 percent discount - was a key component of Detroit emergency manager Kevyn Orr's plan to adjust the cash-strapped city's finances through the municipal bankruptcy process.
Judge Steven Rhodes, who is overseeing the city's historic bankruptcy case, said Detroit was likely to succeed with some potential challenges to the validity of the swaps, which were used to hedge interest-rate risk for some of the $1.4 billion of pension debt the city sold in 2005 and 2006. He also said the $165 million payment to end the swaps was "too high a price to pay."
Rhodes denied Detroit's plan to finance the swap termination through a $285 million loan with Barclays PLC, but the judge said the city could still borrow $120 million to improve services.