CHICAGO -- U.S. Bankruptcy Judge Steven Rhodes will rule Thursday afternoon on whether to accept or reject Detroit's controversial settlement with its interest-rate swap counterparties.
Rhodes made the announcement Monday at the end of a two-day trial on the issue, in which bond insurers and other creditors urged the court to reject the deal.
The clock is ticking on what could be Detroit's first settlement in its historic bankruptcy. It's one of several deals the city is trying to lock down with creditors ahead of filing its Chapter 9 plan of adjustment, expected at the end of the month.
A settlement with holders of the city's nearly $6 billion of water and sewer bonds may also be reached before a plan is filed.
On Monday, court mediators also announced a first-of-its-kind proposal that would create a new foundation to raise money for the city's unfunded pensions while preserving its storied art collection.
The swaps settlement agreement, which was reached with counterparties on Dec. 24, expires on Jan. 31, 2014.
A $285 million loan from Barclays that Detroit would use in part to finance the settlement also expires at the end of the month.
The swaps settlement calls for Detroit to pay the counterparties, UBS AG and Merrill Lynch Capital Services Inc., $165 million plus fees to terminate swaps that have a current value estimated at around $230 million.
Creditors, led by bond insurers, said the city should be suing the swap counterparties instead of settling with them, as parts of the original swap agreement and later amendments are illegal.
At Monday's hearing, attorneys said emergency manager Kevyn Orr should have done a more thorough legal and financial analysis of the city's case before reaching an agreement.
An attorney for Syncora Guarantee Inc., which insures some of the swaps and the pension certificates they hedge, told Rhodes that there is "zero consensus" between creditors and the city toward a plan of adjustment, according to local accounts of the hearing.
It's also not clear that the $285 million DIP loan from Barclays would revitalize the city, Syncora attorney Ryan Bennett said. "It looks like money is going out the door," Bennett told the judge, according to local reports.
Caroline English, an attorney with Arent Fox who is representing bond insurer Ambac Assurance Corp., said the city should not have settled because of legal questions surrounding the swaps.
"This deal should have the counterparties paying the city, not the city paying the swap counterparties," said English.
The city "panicked" in negotiating the settlement, English said. "Doing a deal quickly does not make for the best judgement," she said.
Rhodes pushed her to name a number that would be more fair than $165 million. But the attorney refused. "You're putting me on the spot," English said.
The city, represented by Jones Day, argued in its rebuttal that it was too risky to litigate the matter because it would have tied up crucial casino dollars, which account for 20% of city's revenue.
Lenders would not likely have been willing to lend to Detroit if the casino revenues were trapped, attorneys said.
Attorneys for Merrill Lynch also defended the settlement, telling the judge that $165 million is "the lowest number we would ever accept."
Mark Ellenberg, an attorney with Cadwalader, representing Merrill Lynch, told Rhodes that in fact the settlement is a "win-win" settlement.
