Detroit Bankruptcy Judge May Consider Swap Settlement

CHICAGO — The federal judge overseeing Detroit's bankruptcy case may weigh in this morning on the city's one and only creditor settlement, which would terminate a series of interest-rate swaps hedging its pension certificates.

In what will be the second hearing on Detroit's historic bankruptcy filing, Judge Steven Rhodes could rule on Detroit's plan to pay the swap counterparties 75 cents on the dollar for the termination, currently estimated at just under $300 million.

The status conference hearing is set for 10 a.m.

The city reached the agreement with the counterparties, Merrill Lynch and UBS AG, three days before it filed its July 18 Chapter 9 petition.

Orr said the settlement would give the city access to badly needed casino revenues that are being used to secure the swaps. He's asking for Rhodes to approve the deal, though court approval is not necessary under Chapter 9 rules, according to the motion.

The settlement was the result of "good faith, arm's length" negotiations between the parties, the motion says. "[T]he ability to access, and use, the casino revenue will be essential to the city's continued ability to survive and ultimately to create value for all of its creditors."

Under the settlement, the banks give up their rights to terminate the swaps, and the city can terminate them over a period of time at a rising cost. If Detroit opts to terminate them before Oct. 31, 2013, it will pay the banks 75% of the termination cost; before Nov. 15, it will pay 77%; and before March 14, 2014, it will pay 82%.

The agreement prohibits the banks from seeking payments from the bond insurers that insured the swaps.

In his motion, Orr said the settlement is fair and in the best interest of the city and its creditors. "The forbearance agreement allows the city to access much needed cash flows, provides for a workable unwind of its swap obligations at a discounted price, and avoids potentially protracted litigation involving the swap transactions," the motion says.

Depfa bank PLC, Syncora Guarantee Inc., and a Luxembourg-based bank all filed objections to the settlement, asking the court for more time to discover its impact on other creditors. They also said it's unclear how the city would pay the claims, even at the reduced rate.

The judge is expected to rule on several other key issues, including the city's request to set up a committee to represent retirees, the status of the city's negotiations with creditors, the appointment of a mediator to help negotiations, and a request for a fee examiner to oversee Detroit's legal fees. Rhodes is also expected to rule on his proposed eight-month schedule for the case.

For reprint and licensing requests for this article, click here.
Bankruptcy Michigan
MORE FROM BOND BUYER