CHICAGO - The two banks that are counterparties on Detroit's interest-rate swaps no longer need to drop their claims against Syncora Guarantee Inc. as part of Syncora's settlement with the bankrupt city.

That means Detroit, for the first time in years, is free from any ties to the series of interest-rate swaps that originally hedged $800 million of $1.5 billion of the city's pension certificates of participation, which the city is now trying to repudiate.

Syncora and Detroit reached a deal last week that features a mix of cash, real estate property, and asset leases. Syncora said at the time that it would also require UBS AG and Merrill Lynch Capital Services Inc. to release Syncora from its responsibility on payments tied to interest-rate swaps that are insured by Syncora.

But Syncora dropped that provision after several days of negotiation with the city and other creditors, according to a source close to the case.

The dispute over the swaps is likely to continue, but for the first time Detroit will no longer be part of it.

Syncora has said it believes the banks have acted inappropriately and illegally under the original swaps agreement and will contest any responsibility to pay them off. The banks are expected to pursue payment from the insurer. The swaps were valued at roughly $200 million earlier this year.

Meanwhile, the city's limited-tax general obligation bondholders and a committee representing retirees have agreed to sign off on the Syncora deal, according to the city's newly amended plan of confirmation.

In addition to the banks' agreement, Syncora also wanted the LTGO holders and retirees to drop a claim that would allow their recoveries to rise if the city successfully repudiates the $1.5 billion of certificates. The creditors had reached that agreement with the city in their bankruptcy settlements.

The latest confirmation plan says the two creditors agreed to reduce the amount of money they'd be entitled to if the city wins its lawsuit seeking to overturn the certificates.

Syncora holds $400 million of the COPS and Financial Guaranty Insurance Co. wraps $1.1 billion. The LTGO holders and retirees agreed to lower their claims in a so-called disputed COP claims reserve fund to reflect Syncora's exit from the dispute.

FGIC, the city's sole major holdout creditor, is expected to object to the Syncora deal if it doesn't reach its own separate accord with Detroit.

Under the settlement, Syncora is expected to recover 13.9% of its $390 million pension COP claim in a cash payment generated from Detroit's sale of two note issues. The city said it would offer FGIC the same 13.9% recovery on its COPs if it settled, up from between 6% and 10% the city originally offered for the COPs.

In addition, Syncora will get a 30-year lease on a downtown parking garage with 800 parking spaces, and a 20-year extension on its operating lease for the Detroit-Windsor Tunnel.

It will also get vacant property near the tunnel, which connects Detroit to Canada. A development agreement will give the insurer five years to buy various properties near the tunnel's Detroit entrance to develop for retail or housing, according to city attorneys. The insurer must redevelop the properties within 18 months of closing.

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