CHICAGO -- A day ahead of a hearing on Detroit's proposed interest-rate swap settlement, bond insurer Ambac Assurance Corp. urged the federal judge overseeing the bankruptcy to reject the deal, claiming the terms are too rich in light of legal questions about the original financings.
U.S. Bankruptcy Judge Steven Rhodes Friday is expected to take up the matter of Detroit's newly inked settlement with its interest-rate swap counterparties, UBS AG and Merrill Lynch Capital Services Inc.
An original agreement reached last summer was debated in court two weeks ago, but Rhodes suspended the hearing and ordered the parties to negotiate more favorable terms for the city. The judge voiced frustration after reaching an impasse with Detroit's lawyers, who refused to disclose details behind the city's strategy for treating the swaps as a secured debt amid questions that the swaps and the use of casino revenues as collateral both violate Michigan law.
The city still has not addressed the legal questions, Ambac said
"The compromise embodied in the supplement is still far too rich given the strong and unrefuted arguments that the swap obligations and the pledge of the casino revenue to the swap counterparties are void ab initio," because they violate state law, Ambac argued. "In light of [Rhodes' admonition to city attorneys], one would have expected the city to have made at least some effort in the supplement to address the court's concerns. Because it did not, the court still has none of the information requested."Ambac also argues that the new deal, which calls for the city to pay the banks $165 million — down from roughly $200 million — to terminate the swaps, is less favorable than it appears. The city says the deal marks a payout of roughly 62% on the face value of the swaps compared to 75% in the original swap settlement.
But, Ambac argues, the estimate is based on an "outdated" Dec. 10, 2013 swap valuation. The swaps' value has fallen steadily over the last year as interest rates have climbed. The swaps were valued at between $300 million and $400 million when the original settlement was being negotiated, and had dropped to $266 million as of Dec. 10, 2013, according to Ambac. A city spokesman said the swaps were valued at $248 million as of Dec. 27. Ambac estimated the value could drop to $211 million by Jan. 31.
"If interest rates continue to rise, the undiscounted amount of the termination payment will continue to drop and the $165 million settlement amount will represent an increasingly higher percentage of the termination payment," the insurer said. "If the present trend continues, the revised settlement will be even less favorable to the city than the prior settlement."
The city's pension funds also object to the new settlement deal. Syncora Guarantee Inc., which insurers the swaps and has been one of the main challengers to the settlement, had not yet filed an objection as of Thursday afternoon.
Meanwhile, Mike Duggan was sworn in as the bankrupt city's new mayor Wednesday. He takes over the office from Dave Bing amid a delicate power-sharing agreement with emergency manager Kevyn Orr.
"My goal is to move this city back to elected leadership Oct. 1," Duggan said Wednesday at a press conference after he was sworn in. "At the moment, we have a division of responsibility that I respect. I'm not going to spend any time complaining about it. I'm going to do the best job I can on the areas I'm responsible for. I'm hopeful the plan will work out."
In an interview with the New York Times, Duggan said he hopes to see the city begin to regain population within the next five years. Gov. Rick Snyder has named population growth one of the state's key goals to help rebuild the city.
