DETROIT Jan 13 The agreement struck with two
banks by Detroit to end toxic interest rate swap agreements was
not in the best interest of the city, the groups objecting to
the deal said during closing arguments in a bankruptcy court
hearing on Monday.
The bond insurers, banks, pension funds and others objecting
to Detroit's Dec. 24 deal to terminate interest-rate swaps with
UBS AG and Merrill Lynch Capital Services, a unit of
Bank of America Corp, presented arguments on Monday
during a hearing set to determine whether the deal should be
The hearing was postponed twice last week due to inclement
If U.S. Bankruptcy Judge Steven Rhodes approves the
agreements, Detroit will pay the banks $165 million plus fees to
end the agreements at a 43 percent discount to their original
cost to the city. Detroit entered into the interest-rate swaps
in a failed attempt to hedge, or limit the risk, on some of the
$1.4 billion in pension debt that it sold in 2005 and 2006.
But Caroline English, the attorney representing bond insurer
Ambac Assurance Corp from the law firm Arent Fox, argued the
city had strong legal arguments to support a full termination of
the swaps agreement and should not have settled with the banks.
"This deal should have the swap counterparties paying the
city, not the city paying the swap counterparties," said
Detroit Emergency Manager Kevyn Orr testified previously
that the city settled with the banks because it only had a 50-50
chance of succeeding in litigation and it did not want to risk a
lengthy and expensive legal process. He also testified that the
city did not want to lose access to its casino tax revenue,
which was used as a lien in the swaps deal.
But the objectors argued that the use of casino revenue as a
lien violated Michigan law because the funds were not used to
directly provide services to Detroit residents.
Detroit and the banks initially agreed to terminate the
swaps for $230 million, or 75 cents on the dollar, but Rhodes
encouraged the city to renegotiate the deal to secure better
terms. The city reached its agreement with UBS and Merrill after
two days of mediation on Dec. 23 and Dec. 24 of last year.
Detroit also has reached an agreement with Barclays Plc
for a $285 million loan to end the swaps. Detroit plans
to use about $120 million of the loan to fund improvements to
But Vincent Marriott, who represents Detroit creditors
Hypothekenbank Frankfurt AG, Hypothekenbank Frankfurt
International SA and Erste Europäische Pfandbrief-und
Kommunalkreditbank Aktiengesellschaft in Luxembourg SA, argued
that the court should not approve the post-petition financing.
He said the city should have provided the Detroit City
Council with more information about the loan and also pursued an
"By beginning the solicitation process by offering
collateral, the city ensured substantial collateral would be
granted to the lender," Marriott said.
The lawyer representing Merrill Lynch, Marc Ellenberg,
however, argued that the deal was in the best interest of both
the city and the banks.
"There is such a thing as a win-win transaction," he said in
response to a question from Rhodes about Merrill's motivation
for reaching its agreement with the city.
"There is such a thing as the lesser evil and that's what
we've tried to reach," said Ellenberg.
Detroit was declared legally bankrupt on Dec. 3, making it
the largest U.S. city ever to go bankrupt. The city has more
than $18 billion in debt and other obligations.
Orr had said he planned to file the city's plan to deal with
its debt to the court in the first week of January, but that has
been delayed until the issues surrounding the swaps are dealt
with, spokesman Bill 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.