CHICAGO -- A key bankruptcy hearing on Detroit’s proposed settlement with interest-rate swap counterparties set for this week was delayed Monday to allow negotiations with bond insurers and other creditors to continue.
U.S. Bankruptcy Judge Steven Rhodes granted the last-minute request late Monday.
“A number of objections to the [proposed settlement] were filed by various entities,” the city said in its motion. “The city is engaged in ongoing discussions with the objectors to try to resolve some or all of those objections. The city believes that an adjournment of the hearing ... in order to allow those discussions to continue, would promote efficiency and be in the best interest of all parties.”
Syncora Guarantee, Inc. and Financial Guaranty Insurance Company, the firms that insure the interest-rate swaps and are leading the challenges, agreed with the delay request, according to the city’s motion. No new date has been set.
The settlement has sparked the most opposition in the case yet from bond insurers and pension certificate holders, who have challenged it on several fronts.
The two parties have been in talks with the case’s mediator, Judge Gerald Rosen, for two weeks to try to reach an out-of-court settlement.
The proposed swap settlement, reached days before emergency manager Kevyn Orr filed for Chapter 9, calls for Detroit to pay UBS AG and Merrill Lynch 75 cents on the dollar to terminate the swaps at a penalty recently estimated at just under $300 million. The agreement would give the city access to roughly $11 million a month in casino revenue currently used as collateral on the swaps. The banks would promise not to pursue insurance payments from Syncora.
The city wanted the judge to approve the swap settlement in order to help secure debtor-in-posession financing. It’s unclear how the delay may affect that loan.
Meanwhile, if the case comes to trial, one opponent to the settlement plans to argue that fraud tied to the notorious LIBOR manipulation scheme hurt the city and call for a deeper investigation into the swaps.
Detroit resident David Sole joined the municipal market participants in challenging the settlement. Sole’s attorney Jerome Goldberg, a Detroit-based anti-foreclosure attorney, said he plans to call a municipal finance scholar with a focus on fraudulent interest-rate swaps.
Saqib Bhatti, who is also a financial analyst for the Service Employees International Union, says that Detroit lost at least $11 million from banks’ alleged manipulation of the London Interbank Offered Rate. The city’s swaps are based on the benchmark lending rate.
A host of plaintiffs, including cities and private investors, have sued for damages over the manipulation of the daily rates that were used in swaps and securities transactions.
The city deposed Bhatti last week as part of the case.
Bhatti based his $11 million loss figure on a 2012 study entitled “Does LIBOR reflect banks’ borrowing costs,” which has been used by several investors to calculate losses, according to a court motion filed by Goldberg.
“Mr. Bhatti’s testimony, based on his personal knowledge concerning LIBOR manipulation, may assist the court in deciding whether the swap agreements in the instant case merit a close examination of this issue before the [swap settlement] is approved or not,” Goldberg said in the filing.
Like the municipal market challengers, Goldberg said the settlement is unreasonably favorable to the counterparties.
“Why would the city enter into this kind of forebearance agreement when there are all sorts of questions that need to be answered?” the attorney said in a telephone interview. “They might not find anything, but since there’s tons of SEC investigation into a lot of problems associated with swaps, my view is it would be better if the city took some time to look into these issues, and maybe get a much better deal.”
Several bond insurers and holders of some of the pension certificates are also opposed to the settlement. Along with Syncora, which insures the swaps and a chunk of the pension certificates, Ambac Assurance Corp., Assured Guaranty Municipal Corp., FGIC, and National Public Finance Guarantee Corp., filed court briefs challenging the agreement last week, arguing in part that the 75% deal overpays one set of creditors at the expense of others. FGIC also insures some of the swaps.
Syncora argued that the swap termination would negatively affect the firm’s financial position as its interest-rate risk exposure would grow dramatically if the swaps are terminated, and that the swaps feature a provision that gives Syncora the right to refuse a termination in the event of a default on the certificates. Detroit skipped its $39.7 million certificate payment in June.
Ambac, in an Aug. 16 court filing, called the validity of the swaps lien on casino revenue “highly dubious” and said it is in violation of state law, which does not allow casino revenue to be used as collateral on a financial obligation.
Ambac also argued that the casino revenue does not qualify as special revenues that are exempt from the bankruptcy case. Assured called the proposed settlement “unreasonably favorable to the swap counterparties.”
