CHICAGO — Syncora Guarantee Inc. is challenging the one and only settlement Detroit had made in its Chapter 9 bankruptcy, the city's $85 million deal with its interest-rate swap counterparties.

The insurer wraps a chunk of the pension certificates of participation that the swaps hedge, as well as the swaps themselves.

The challenge comes the day after bond insurer Financial Guaranty Insurance Corp. filed its opposition to the city's lawsuit invalidating the COPs.

FGIC wraps $1.1 billion of the COPs, and Syncora insurers $329 million.

Syncora says in its new filing that the revised settlement is materially different than the previous two the city presented — which the court rejected as too costly — and that the bankruptcy court does not have the power to sign off on key provisions of the deal.

The main difference, says Syncora, is that the new settlement leaves out of the deal the service corporations that the city set up in 2005 to issue the $1.5 billion of pension certificates. The city in January sued to repudiate the COPs deal, arguing that the service corporations are in fact sham entities.

Leaving out the service corporations "profoundly" changes the nature of the settlement, Syncora argues. It is the service corporations that have the liens on the city's casino revenues, not the swap counterparties or the city, so they need to be a party to the deal, the insurer says.

"Their absence from the agreement, coupled with the contractual provisions of the collateral agreement, means that the new settlement cannot achieve the goal of freeing up the casino revenues," the insurer argues. Syncora also notes that the deal does not actually terminate the swaps, so that its benefits are not immediately clear.

Detroit says the new deal is key to the city's overall plan of debt adjustment. The deal calls for the city to pay the two counterparties, UBS AG and Merrill Lynch Capital Services Inc., $85 million in exchange for access to the casino revenues and the banks' approval of the debt adjustment plan.

The banks' approval of the plan would give the city an impaired accepting class, allowing it to pursue a cramdown for the rest of its creditors if necessary.

That provision "does not merely prejudice Syncora — it works an actual alteration to contractual rights Syncora has that cannot be altered without its consent," the insurer argues.


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