CHICAGO — Detroit's two interest-rate swap counterparties have returned to court to complain that the city's plan of confirmation does not conform to the terms of the settlement they reached with the city.
The deal was one of the first and most-publicized settlements the city made in its bankruptcy case.
Merrill Lynch Capital Services Inc. and UBS AG, the banks that act as counterparties on swaps hedging roughly $800 million of the city's pension certificates of participation, filed a court notice Monday that warned of one remaining dispute with the city.
The banks said they only agreed to sign off on a plan of confirmation if it treats the banks' rights and claims "no less favorably" than the terms of the settlement agreement.
But Detroit's current plan requires that approving creditors release a variety of parties from the threat of future litigation, a provision that the banks say is broader than the terms of the settlement.
"Since the filing of the plan, the city and the swap counterparties have engaged in productive discussions and continued to narrow all but one of the swap counterparties' concerns," attorneys for the banks wrote in the brief, adding that the current plan fails to fulfill one outstanding disagreement.
"[C]reditors who vote in favor of the plan are required to provide releases that are substantially broader than the releases set forth in the settlement agreement," the banks argue. "Specifically, the plan release would require the swap counterparties to release the city's and the state's 'related entities' and other 'released parties,' which include certain non-debtor third parties that the swap counterparties did not agree to release in the extensively negotiated and specifically tailored settlement releases," the brief said. "Creditors voting in favor of the plan are not afforded an opportunity to 'opt out' of the plan releases, which the swap counterparties believe render the plan releases non-consensual."
The banks do not yet know what entities will be included in the release, but are concerned they may be ones that they have other commercial relationships with.
The banks have proposed revisions that would satisfy them, but the city has not yet agreed to them.
Bankruptcy Judge Steven Rhodes approved the settlement on April 11. The deal calls for Detroit to pay UBS Merrill Lynch $85 million to avoid termination of the swaps, estimated at roughly $288 million, in exchange for the banks' support of the confirmation plan.
A trial on the plan is set for Aug. 14.
Meanwhile, the holders of $5.3 billion of water and sewer revenue bonds filed a brief Monday arguing that the bankruptcy code prohibits the city's planned treatment of the debt in its confirmation plan.
Detroit wants to repay principal in full but restructure the debt with a lower interest rate and strip it of call protections.
In the brief, US Bank NA, the bond trustee, joined by the Ad Hoc Committee of Holders of Certain DWSD bonds, argued that the proposals are illegal under Chapter 9. They also argue that their claims are protected by the code's absolute priority rule — the order of payment in a bankruptcy — which is part of the "fair and equitable" treatment required in bankruptcy.
The parties filed the brief in response to Rhodes' request last month that they, along with several other creditors, provide additional arguments on certain legal issues in the case.
Separately, the bond insurers of the water and sewer bonds and the city's unlimited-tax general obligation bonds asked the court Monday to approve their exclusive right to vote on the confirmation plan above individual bondholders.
The filing came after a June 24 deadline passed for individual bondholders to object to the insurers' efforts to have the exclusive right to vote on the plan.
Assured Guaranty Municipal Corp. and Ambac Assurance Corp. both filed court briefs. Assured filed one on behalf of the ULTGO bonds and one on behalf of the DWSD debt.
The requests come several days after the Ad Hoc Committee of DWSD bondholders filed a statement agreeing not to contest Assured Guarantee's exclusive right to vote and make the election for the Assured-insured bonds, and no one objected to the ULTGO voting claim.