(Adds comments from city's emergency manager)
By Cherie Curry
DETROIT, April 11 Detroit's plan to get out of
bankruptcy cleared a major hurdle on Friday when a U.S.
Bankruptcy Court judge approved the cash-strapped city's third
attempt at settling costly interest-rate swap agreements with
two investment banks.
The city will pay $85 million to UBS AG and Bank
of America unit Merrill Lynch Capital Services, much
less than had been proposed on two previous attempts.
The banks join a growing list of supporters for Detroit's
plan to adjust $18 billion of debt and other obligations.
With this deal in place, along with a recent settlement with
three bond insurers, the city now has more supporters among key
creditors to exit bankruptcy, even if it faces opposition from
other creditors, including the city's labor unions and pension
Kevyn Orr, the city's state-appointed emergency manager
filed the biggest municipal bankruptcy in U.S. history in July
as the city grappled with a huge debt load and fears that the
banks could demand a big payment to terminate the swap
In his bench ruling, Judge Steven Rhodes warned creditors
fighting the plan that the city may now be eligible for a
so-called cramdown judgment in which the court could confirm the
plan without any further agreements by creditors.
"The message is that now is the time to negotiate, not on
the eve of the confirmation hearing in July, nor even in June or
in May, but now," Rhodes said.
Orr, who has said he hopes to have the bankruptcy wrapped up
by Oct. 15, also urged creditors to get on board.
"I reiterate Judge Rhodes's request that all parties
negotiate and reach resolutions," Orr said in a statement. "We
don't have the luxury of time - the offers on the table are
grounded in reality and they won't last forever."
The judge, who rejected two previous proposed swap
settlements as too expensive for the broke city, said the new
deal is "entirely reasonable." Orr said Detroit had been facing
an approximately $288 million termination payment and that the
court-approved settlement will save the city about $200 million.
The swaps were used to hedge interest-rate risk on some of
the $1.45 billion of pension debt Detroit sold in 2005 and 2006.
However, the city's bet that interest rates would rise proved
wrong as rates fell along with the city's bond ratings, souring
The previous settlements rejected by the judge had been much
higher, at $230 million and $165 million.
On Wednesday, Detroit said it had reached a settlement with
three bond insurers over the treatment of voter-approved general
obligation bonds. As part of that settlement, the insurers
agreed to vote in support of the city's debt adjustment plan as
Rounding up support for the restructuring plan from the
banks and insurers could ultimately ease the way for the city to
exit bankruptcy. If enough creditors approve the plan, then
Detroit could force its terms on the creditors who object to it.
In an interview with Reuters on Wednesday, Orr said a
cramdown would risk the loss of $816 million pledged by
philanthropic foundations and the state of Michigan to ease
retiree pension cuts.
Rhodes concluded that objections by bond insurer Syncora
Guarantee, European banks that own some of the pension debt, the
city's retired workers, and others lacked merit. Syncora and
fellow bond insurer FGIC, along with the retirees committee,
declined to comment on the ruling on Friday.
Those objecting had said the investment banks would fare
better than Detroit's other creditors who face steeper losses in
the bankruptcy case. Creditors also questioned the legality of a
lien on casino tax revenue that Detroit granted to the banks in
2009 to stop them from forcing the city to pay as much as $400
million to end the swaps.
Rhodes said while there was a possibility Detroit could
recover as much as $400 million by suing the banks, it was
uncertain if the litigation would be successful.
Detroit will pay the $85 million to the banks over time,
freeing up the casino revenue for critical city operations.
The city's labor unions, pension funds, and a
court-appointed retirees' committee, along with bondholders,
bond insurers, two Michigan counties and many other creditors
filed a slew of objections on Monday to the revised plan Detroit
sent to the court on March 31.
The objections to the amended disclosure statement, which is
the key supporting document for the plan, said it was missing
crucial details needed by creditors to help them decide how to
vote on the plan.
The city has until Monday to try to resolve the objections
ahead of a Thursday court hearing.
(Reporting by Cherie Curry Additional reporting by Karen Pierog
in Chicago and Lisa Lambert in Washington; Editing by Barbara
Goldberg, James Dalgleish and Jonathan Oatis)