News Column

Bank of America, UBS given 5 p.m. deadline to make Detroit bankruptcy offer

January 31, 2014

By Nathan Bomey, Detroit Free Press

Jan. 31 -- Detroit told two global banks that today is the deadline to deliver a better offer to settle a complex and potentially illegal debt deal dating back to 2005. Without an acceptable deal to eliminate the controversial "swaps" debt, the city may sue Bank of America Merrill Lynch and UBS in U.S. Bankruptcy Court in a bid to wipe out the debt. Bill Nowling , a spokesman for Detroit emergency manager Kevyn Orr , said the city would probably make a decision on how to proceed by 5 p.m. "We've been in negotiations primarily with Bank of America because they're the largest in the swap deal," he said. "They asked for a 30-day extension, and we said 'no,' we'd give them until the end of the day today." Meanwhile, the city been unable to negotiate new terms with Barclays on a loan to borrow $120 million to improve city services, which must be reconfigured after Judge Steven Rhodes rejected a plan to use an additional $165 million in Barclays money to pay off the swaps. The city is still negotiating the loan with Barclays , but if the deal collapses, the city would likely request loans from one of three other banks that sent commitment letters to the city when it was originally seeking borrowed cash to eliminate the swaps and improved services. The original loan with Barclays had to be completed by today -- and the city's original settlement with the swaps banks also had to be executed this week. But Rhodes questioned the legality of the original swaps transactions, saying the city would "likely" win a lawsuit against UBS and Bank of America if it pursues the case. Rhodes' statement gave the city negotiating leverage to push the banks for a better settlement than $165 million . A lawsuit would set up a dynamic showdown over a disastrous pension debt interest-rate deal from 2005 that soured quickly and stuck the city with a $50-million -per-year bill. The swaps deal -- which secured a steady interest rate on a $1.4 billion pension borrowing deal -- helped plunge Detroit into Chapter 9 bankruptcy. There's a risk for the city in pursuing the suit, though. The banks could fire a pre-emptive strike by seizing the city's casino taxes, a vital source of revenue that Detroit put at risk in 2009 when it pledged the revenue stream as collateral on the debt deal. And if the banks prevailed in a lawsuit, they could seize the entire value of the swaps contracts in the form of the city's casino revenue. Contact Nathan Bomey : 313-223-4743 or . Follow him on Twitter @NathanBomey. ___ (c)2014 Detroit Free Press Visit the Detroit Free Press at Distributed by MCT Information Services

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Source: Detroit Free Press (MI)

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