4 Min Read
(Recasts with judge's upcoming ruling, details)
DETROIT, April 3 (Reuters) - A federal judge overseeing Detroit's historic bankruptcy case said on Thursday he will rule April 11 on a proposal to end costly interest-rate swap agreements, a key issue as the city seeks to exit bankruptcy later this year.
Judge Steven Rhodes made the announcement after a day-long hearing that included testimony by Detroit Emergency Manager Kevyn Orr, who defended a proposed $85 million payment to UBS AG and Bank of America unit Merrill Lynch Capital Services to terminate soured swaps that were used to hedge interest rate risk on Detroit's pension debt.
The money owed to the investment banks helped drive Detroit to file the biggest municipal bankruptcy in U.S. history in July 2013. A plan to end the swaps at a discount has been a key facet of Detroit's case since then.
Attorneys for a bond insurer, bondholders and the city's retired public workers argued against the deal, which marks the third proposal Detroit has presented to the judge.
Objections to the latest deal noted concerns the two investment banks would fare better than Detroit's other creditors and the banks' intention to support Orr's proposed debt adjustment plan could be used to force the plan on other creditors.
The possibility of litigation against the banks was also raised. Creditors' attorneys questioned the legality of a lien on casino tax revenues which Detroit granted to the banks in 2009 to stop them from forcing the city to pay as much as $400 million to terminate the swaps.
"The city is asking the court to bless a pledge that's in direct violation of state law," said Carole Neville, an attorney for a court-appointed committee representing city retirees.
Orr testified that resolving the swaps was in the best interest of the city as opposed to the cost of challenging the swap agreements in court.
"It was significant. It could be millions of dollars a month," the city's emergency manager said.
But Rhodes rejected as too costly two previous proposed swap settlements that carried bigger price tags. When he nixed a $165 million proposed deal in January, the judge said Detroit could succeed with its legal challenges to the validity of the swaps, noting that the city probably did not have a right under Michigan law to pledge casino tax revenue as collateral to secure the swaps.
In his testimony, Orr also said he wants the city to exit bankruptcy by Oct. 15, which would be just weeks after his 18-month term as state-appointed emergency manager is scheduled to end.
Orr, who started in March 2013, had initially expressed hope the bankruptcy would speed along. Instead, the case has largely limped along as scores of city creditors objected to pension cuts and other critical proposals.
Late on Wednesday, Rhodes issued his third revision of a schedule to confirm Detroit's plan to deal with its $18 billion of debt and other obligations. The revision extends some key filing dates ahead of a trial on the plan that would start on July 16. (Reporting by Cherie Curry in Detroit, aadditional reporting by Karen Pierog in Chicago; editing by Steve Orlofsky and G Crosse)