DETROIT Jan 16 A U.S. bankruptcy judge on
Thursday rejected a deal allowing Detroit to end costly
interest-rate swap agreements with two investment banks,
possibly further delaying when the city will submit to the court
its plan to adjust its debt.
Ending swaps agreements with UBS AG and Bank of
America Corp's Merrill Lynch Capital Services for $165
million - a 43 percent discount - has been a key component of
Detroit emergency manager Kevyn Orr's plan to adjust the city's
finances through the bankruptcy process.
Judge Steven Rhodes, who is overseeing the city's historic
bankruptcy, said Detroit likely could succeed with potential
challenges to the validity of the swaps agreements. The $165
million cost of eliminating the swaps was "too high a price to
pay," Rhodes said.
Despite rejecting the deal, Rhodes said that settling the
swaps deal for less is more advantageous than litigating the
claims. Rhodes said he "strongly encourages the parties to
continue to negotiate" even if the city decides that filing suit
is its best option.
The swaps were used to hedge interest-rate risk for some of
the $1.4 billion of pension debt the city sold in 2005 and 2006.
Detroit had planned to finance the swaps termination through
a $285 million loan from Barclays Plc, but the judge
denied the city's request to borrow that sum. Detroit could,
however, still borrow $120 million to improve services, Rhodes
The $285 million loan from Barclays had been contingent on
Detroit's pledging funds from the city's casino tax as
collateral, but those funds are pledged as security on the
original swaps agreements with UBS and Merrill Lynch.
It was not immediately clear if Barclays would be willing to
provide the $120 million loan to help Detroit cover the cost of
Representatives of UBS and Bank of America declined to
comment on the judge's ruling. Orr's spokesman, Bill Nowling,
did not immediately respond to a request for comment.
Robert Gordon, lawyer for the city's pension funds, said
Detroit's planned payment to UBS and Merrill essentially treated
them as secured creditors. "Paying them close to whole dollars
was just far too rich," Gordon said.
Detroit's pension funds, bond insurers, banks and others
opposed the termination deal. The objectors argued that the city
should not have settled with the banks because it had convincing
legal arguments to completely terminate the swaps.
But Orr, who has been running Detroit since March, testified
in court that the city had only a 50-50 shot of winning the
litigation, and he did not want to risk expensive legal
proceedings or losing access to casino tax revenue, which was
used as a lien in the swaps. The casino tax accounts for about
20 percent of the city budget, Orr has said.
The deal Rhodes rejected was the city's second such
agreement with its swaps counterparties. Detroit originally had
proposed a deal with Merrill and UBS in which the city would
have ended the swaps at 75 cents on the dollar with a $230
million payment, but in a December hearing Rhodes called on the
city to negotiate more favorable terms.
Detroit reached the new agreement with the banks after two
days of mediation in late December.
Orr testified in court earlier this month that Detroit
initially proposed a termination fee of $145 million to $150
million but that the investment banks would not agree to
anything less than $165 million.
The swaps deal is one of the obstacles the city has sought
to clear away so Orr can submit a proposal to the court on how
Detroit plans to deal with its more than $18 billion in debt.
Meanwhile, mediation efforts have begun to bear fruit, with
philanthropic foundations connected to Detroit pledging $330
million to help the city. In addition, Governor Rick Snyder is
preparing to propose $350 million of support, over 20 years, to
help protect worker pensions and prevent the Detroit Institute
of Arts collection from being sold, according to reports on
Thursday in the Detroit Free Press and elsewhere.
Orr had said he was going to submit the plan to the court in
the first week of January, but that was delayed until the swaps
were settled and other mediation efforts played out, Orr's
spokesman, Nowling, said in an email last week.
"If it looks like mediation efforts are bearing fruit, it
could push back the release date as we look to include any
mediated agreements in the plan," Nowling said.