The deal to terminate the swaps, which were used to hedge interest
rate risk on some Detroit pension debt, would cost the bankrupt city
just $85 million. That is a steep drop from two previous deals that
carried price tags of $165 million and around $230 million,
respectively and were rejected by U.S. bankruptcy Judge Steven
Rhodes as being too expensive for the broke city.
Detroit late Monday filed a motion asking Rhodes, who is overseeing
the city's historic municipal bankruptcy case, to approve the new
deal. In the filing, Detroit argued the agreement with swaps
counterparties UBS AG and Merrill Lynch Capital Services could help
the city win federal court approval of a plan to deal with its $18
billion of debt and exit bankruptcy.
"We look forward to Judge Steven Rhodes' decision on our proposed
settlement, and we hope the ‘swaps' resolution serves as a model for
compromise on other matters related to Detroit's finances," said
Kevyn Orr, Detroit's state-appointed emergency manager in a
UBS and Merrill, a unit of Bank of America Corp, have agreed to vote
in favor of the plan, and the agreement with the banks could help
Detroit force its plan of adjustment on dissenting creditors,
according to the city's court filing. Under Chapter 9 of the federal
bankruptcy code, a city that wins agreement from a single class of
creditors whose interests are impaired by bankruptcy can then seek
to impose settlement terms on other classes of creditors.
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Detroit's plan of adjustment, which the city filed on February 21,
calls for painful cuts to unsecured creditors, including Detroit's
retirement systems and certain bondholders, making their acceptance
of the deal unlikely.
Under a cramdown scenario, the plan could be approved by a judge if
it does not discriminate unfairly and is fair and equitable. The
city has contended its plan meets those tests.
The investment banks have also agreed to release their claim on
Detroit casino tax revenue once the termination payment is made,
according to the city's court filing. That payment would be made
over time so Detroit said it will no longer need to seek financing
to raise the money.
(Reporting by Karen Pierog; editing by Eric Walsh and Lisa Shumaker)
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