News Column

Detroit has 3rd agreement to settle bad debt deal

February 19, 2014

By Nathan Bomey, Detroit Free Press



Feb. 19--The City of Detroit will seek court approval of a new settlement with two banks that could erase a controversial financial transaction that helped drive the city into Chapter 9 bankruptcy.

The city has negotiated new terms on a settlement with UBS and Bank of America Merrill Lynch over swaps, after U.S. Bankruptcy Judge Steven Rhodes rejected two previous agreements.

The transaction, which was brokered by Mayor Kwame Kilpatrick's administration in 2005, involved interest-rate swaps. The swaps secured a steady interest rate of 6% on $1.4 billion in debt that was used to eliminate Detroit's unfunded pension liabilities at the time.

But the original deal soured when U.S. interest rates plummeted, meaning the city had to pay the banks, and today the swaps cost about 5% of Detroit's annual budget.

The city wants to exit the deal to free up more cash to improve services such as police, fire and blight removal.

Robert Hertzberg, a Pepper Hamilton attorney representing Detroit, told Judge Rhodes this morning that "our goal" is to submit details of the new proposed swaps settlement with the court within three to four days.

Rhodes has twice rejected proposed settlements between Detroit and the banks to eliminate the swaps, saying the deals were too generous for the banks. In December, he blocked a deal under which the city would have paid the banks $230 million to exit the swaps. In January he rejected a $165-million settlement.

"It's just too much money," he said.

Rhodes said it was "likely" that the city could successfully challenge the legality of the swaps.

At a hearing this morning, Detroit bankruptcy attorney Jeffrey Ellman of law firm Jones Day told Rhodes the city still hopes to file its proposed bankruptcy restructuring plan "this week."

The proposal, called a plan of adjustment, is due by March 1.

"How many days until March 1?" Judge Rhodes said.

Ellman responded, "We're well prepared to file our plan. But then there's the process of getting the plan approved."

Contact Nathan Bomey: 313-223-4743 or nbomey@freepress.com. Follow him on Twitter @NathanBomey.

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Source: Detroit Free Press (MI)


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