CHICAGO — Detroit sued Syncora Guarantee Inc. in state court Friday, accusing the bond insurer of blocking access to casino revenue and interfering with delicate negotiations over interest-rate swaps hedging pension certificates.
It's the first lawsuit filed against a creditor by Detroit emergency manager Kevyn Orr.
Orr said Syncora's move to force a freeze on all casino revenue endangers the city's restructuring and could force a default on its secured debt.
Syncora is one of six monoline bond insurers that wraps most of Detroit's debt. The firm insures interest-rate swaps that hedge about $800 million of the $1.4 billion of pension certificates as well as a chunk 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.
The city defaulted on a June 14 payment on the pension certificates of participation, but has not defaulted on the swap payments, according to Orr.
The city's lawsuit says Syncora on June 17 sent a letter to US Bank, the swap custodian for the casino revenue, saying it considered the city in default on the swap payments and instructing the bank to withhold all casino revenue from the city.
When US Bank balked, Syncora followed up June 24 with a letter that threatened to hold the bank responsible for any release of funds, according to the complaint.
The current agreement with the swap counterparties calls for US Bank to withhold only the portion of casino revenue used for monthly swap payments, and then release the rest of the revenue to the city.
The city filed the lawsuit Friday in Wayne County Circuit Court. Judge Annette Berry granted the city's request that it be given access to the casino revenue. A hearing has been set for July 26 before Judge Jeanne Stempien, where Syncora must show cause why further preliminary injunction should be granted.
Syncora's move could precipitate a default on its July 11 swap payment to the swap counterparties, which the lawsuit describes as among the city's largest secured creditors.
The firm is attempting to "bootstrap" its position as insurer on the swaps to its position as insurer on the COPs, Orr said.
"Syncora is seeking to take advantage of its unsecured position on the COPs to obtain preferential treatment over the city's other unsecured debt and legacy obligations," Orr said in a statement Saturday.
A Syncora spokesman did not immediately return calls for comment.
Syncora derailed negotiations with the swap counterparties just as the city became "close to a final settlement" with the counterparties, according to the lawsuit. If completed, the agreement would be Detroit's first settlement with a creditor.
"Syncora's letter, however, brought these negotiations to a standstill because unimpeded access to the casino revenues is a significant part of the basis for the bargain," the lawsuit says.
"Syncora's effort to trap Detroit's casino revenues is a deliberate attempt to push Detroit onto the horns of a dilemma: either offer concessions to Syncora on their COPs obligations or default on the swap payment and risk a several hundred million dollar termination payment to the counterparties for which Syncora has only a limited responsibility."
Snycora's liability on the swaps in the case of a termination is capped at $50 million, according to the city.
The city receives about $180 million a year from casino taxes and developer payments. Monthly swap payments total $4 million, with another $11 million typically then released back to the city.
The city has negotiated with the counterparties for years to avoid a termination payment, currently estimated at $340 million.
The counterparties are UBS AG and SBS Financial Products Co., which is part of Siebert Brandford Shank & Co. Merrill Lynch & Co. provided a guarantee on the Siebert piece, and it has been the main negotiator, with UBS, on the swaps. The swaps were insured by Syncora and Financial Guaranty Insurance Co.
A 2009 settlement led to the casino revenue lien. The agreement established the so-called lockbox structure with US Bank to hold a portion of the payments monthly as collateral on the payment.
Syncora was not a party in the swap agreement and "had no independent rights under it," the city's lawsuit says. "The collateral agreement did not change Syncora's obligations as an insurer on the swaps. Nor did the collateral agreement in any way purport to secure payments under the COPs."
The city's negotiations with other creditors, meanwhile, continues through the week. Orr may announce a plan to take over the city's pension plans, which he says are dramatically less well funded than previously thought.
On Wednesday, Orr plans to take about 40 creditors, including bond insurers and other "unsecured creditors," on a bus ride through the city to demonstrate the extent of the blight, said Orr spokesman Bill Nowling. The move comes after a request from some creditors, Nowling said.
"We want them to have a better appreciation for the structural and endemic issues facing the city and how that is hampering how it provides the base level of services," he said in an email.
"We will have a tour that puts the city's 139-square-mile footprint in perspective and gives our creditors an idea of what people who live in an insolvent city deal with on a daily basis."