By Karen Pierog
March 3 Detroit on Monday said it reached an
agreement with two investment banks to end costly interest rate
swaps, a move that could give Detroit access to revenue from
casino taxes and give it leverage in efforts to win court
approval for the city's plan to restructure its debt.
The deal to terminate the swaps, which were used to hedge
interest rate risk on some Detroit pension debt, would cost the
bankrupt city just $85 million. That is a steep drop from two
previous deals that carried price tags of $165 million and
around $230 million, respectively and were rejected by U.S.
bankruptcy Judge Steven Rhodes as being too expensive for the
Detroit late Monday filed a motion asking Rhodes, who is
overseeing the city's historic municipal bankruptcy case, to
approve the new deal. In the filing, Detroit argued the
agreement with swaps counterparties UBS AG and Merrill
Lynch Capital Services could help the city win federal court
approval of a plan to deal with its $18 billion of debt and exit
"We look forward to Judge Steven Rhodes' decision on our
proposed settlement, and we hope the 'swaps' resolution serves
as a model for compromise on other matters related to Detroit's
finances," said Kevyn Orr, Detroit's state-appointed emergency
manager in a statement.
UBS and Merrill, a unit of Bank of America Corp,
have agreed to vote in favor of the plan, and the agreement with
the banks could help Detroit force its plan of adjustment on
dissenting creditors, according to the city's court filing.
Under Chapter 9 of the federal bankruptcy code, a city that wins
agreement from a single class of creditors whose interests are
impaired by bankruptcy can then seek to impose settlement terms
on other classes of creditors.
Detroit's plan of adjustment, which the city filed on Feb.
21, calls for painful cuts to unsecured creditors, including
Detroit's retirement systems and certain bondholders, making
their acceptance of the deal unlikely.
Under a cramdown scenario, the plan could be approved by a
judge if it does not discriminate unfairly and is fair and
equitable. The city has contended its plan meets those tests.
The investment banks have also agreed to release their claim
on Detroit casino tax revenue once the termination payment is
made, according to the city's court filing. That payment would
be made over time so Detroit said it will no longer need to seek
financing to raise the money.