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 broke city.
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 bankruptcy.
"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.