CHICAGO — Detroit said in court papers filed Monday morning that it has reached an “important settlement with certain of its creditors” that renders moot an escalating battle with bond insurer Syncora Guarantee Inc. over casino revenues.
If confirmed, the settlement would be the city’s first as Detroit emergency Manager Kevyn Orr negotiates with creditors of the city’s $17 billion of debt to try to avoid bankruptcy.
Details of the settlement may be revealed as soon as Monday afternoon, a spokesman for Orr said.
Detroit announced the settlement as part of a preliminary response to an emergency motion filed by Syncora late Friday that seeks to overturn the city’s lawsuit blocking the firm from freezing casino revenues.
Syncora’s motion sought to overturn a temporary restraining order blocking the insurer from “trapping casino revenue” and accused Detroit emergency manager Kevyn Orr of mischaracterizing the “egregious misrepresentations and omissions” and of negotiating in bad faith.
The city’s Monday-morning filing in federal court indicated a settlement with some creditors makes the dueling lawsuits unnecessary.
“The city of Detroit believes that most of the pending activities in this case have become moot,” the motion says.
The city said it had already agreed Friday to drop its request for a restraining order, but Syncora filed its lawsuit anyway.
“The city reached in principle an important settlement with certain of its creditors late Friday afternoon, which we understand will be executed later [Monday],” the motion said. “We believe this settlement moots many of the issues in this case, including those Syncora used as a pretext for interfering with the city’s banking relationships.”
The city said there will likely be no need to go forward with a preliminary hearing on the Syncora case set for July 26.
“As a result of the foregoing, there are no pending actions of the court requested by the city and no need for expedited proceedings or expedited discovery.”
The response goes on to say that Syncora’s request for discovery served Friday is broad, burdensome and will come at great cost to the city. It also said Syncora’s request that the city “disgorge” up to $15 million in casino revenue is improper and comes at a time when the city is desperate for cash.
Syncora’s emergency motion to dissolve the temporary restraining order came a week after Detroit sued Syncora for blocking the city’s access to casino revenue, saying the move was illegal, threatened negotiations with the swap counterparties, and was forcing the city closer to bankruptcy.
Syncora insures a chunk of the city’s pension certificates as well as interest-rate swaps hedging the certificates. The swaps are secured by casino revenues.
With the motion, Syncora becomes the second bond insurer to publicly push back against Orr’s plan to restructure the city’s debt after six weeks of negotiations. Syncora is one of six monolines who insure nearly all of Detroit’s bonds. Ambac Assurance Corp. last Monday called Orr’s plan harmful to the city and announced it was hiring a firm to advise the company on $170 million of Detroit general obligation bonds it insures.
Syncora said in its motion filed Friday that Orr exaggerated information in its July 5 lawsuit, which was filed in Wayne County Court and subsequently moved to federal court. The circuit court judge granted Orr’s request for a restraining order on Syncora’s order for the trustee to hold onto the casino revenue and set a hearing for July 26.
The city’s lawsuit “tells just half the story, conveniently mischaracterizing or omitting those parts that would reflect poorly on the city and its emergency manager,” Syncora’s motion says.
Orr’s lawsuit accused the firm of “trapping” casino revenues dedicated to the swap payments because of the city’s default on its pension certificates, arguing that the certificates’ default did not affect the swap payments, which were not in default.
Syncora says the certificate default triggered a cross-default under the swap agreement, which automatically triggered the cash trap.
“Without Syncora standing next to it at the podium pointing out the egregious misrepresentations and omissions contained in its papers, the city easily obtained [the restraining order] that destroyed the status quo by releasing $15 million in collateral funds that the insolvent city presumably has dissipated, never to be recovered,” the motion said.
Syncora said the city negotiated in bad faith while moving to file its lawsuit. “[T]he city used the carrot of further negotiations to string Syncora along and lull it into a false sense of security -- all the while the city was surreptitiously preparing its motion.”
Syncora insures interest-rate swaps that hedge about $800 million of the $1.4 billion of pension certificates as well as a portion of the pension certificates themselves.
The swaps have a lien on revenue generated by Detroit’s three casinos and are considered among the city’s most secure debt. The pension certificates have no specific revenue lien and are considered among Detroit’s least-secured debt.