CHICAGO -- Detroit officially ended an interest-rate swap termination agreement with its counterparties Thursday, a move that the bankrupt city says preserves its right to pursue legal action against the banks.
Detroit filed a court docket that outlines the action. The move is allowed under a provision that allowed either the city or the banks to terminate the agreement after Jan. 31, 2014.
A disposition of the swaps is one of the biggest hurdles Detroit must overcome to exit Chapter 9 bankruptcy.
The city is continuing to negotiate with the counterparties, UBS AG and Merrill Lynch Capital Services, Inc., to try to reach an agreement, according to Bill Nowling, spokesman for Detroit emergency manager Kevyn Orr.
"The letter we filed with the court, which was sent to swap counterparties on the 31st, was merely a formality to inform them that the city intended to preserve its legal right to sue on the swaps even though the forbearance agreement was coming to an end and negotiations were continuing," Nowling said in an email.
The city has been negotiating with the banks to end the costly interest rate swaps, which hedge $800 million of pension certificates, since before it filed for bankruptcy on July 18.
Bankruptcy Judge Steven Rhodes last month rejected the most recent settlement, which would have had the city pay $165 million to terminate, saying the terms were too rich for the counterparties.
Orr faxed the counterparties the termination letter on Jan. 31, and copied as well the two service corporations that the city set up in 2005 to serve as the issuer on $1.4 billion of pension certificates.
On the same day, Orr filed a lawsuit suing the service corporations -- which are essentially city entities -- in an effort to invalidate the debt, saying it was illegal because it violated city debt limits in the first place.
The lawsuit does not mention the swaps, but is widely seen as a maneuver toward a fresh settlement.
