Detroit Bankruptcy Case Judge Rejects Payoff of Banks To Exit Swaps Deal
January 17, 2014 • 11:55AM

Bankruptcy Judge Steven Rhodes ruled Thursday against a proposed deal for Detroit to exit a costly swaps deal with UBS AG and Bank of America Corp.'s Merrill Lynch Capital Services for $165 million. The swaps deal was originally made in 2005 as part of the sale of city debt to make payments on its pension liabilities. On the eve of the city's bankruptcy filing last March, Emergency Manager Kevyn Orr negotiated a settlement for the two banks to accept 75 percent ($230 million) of what they would otherwise be owed, even as he planned a bankruptcy filing to savage the retirement and healthcare benefits of the city's employees, and make other cuts that will cripple the city.

During the course of the bankruptcy proceedings late last year, Rhodes demanded that the City provide him with any materials it had drawn up at the time about whether the swaps deal was legal. At about the same time, Rhodes stopped the proceedings and ordered the City to go back to the two banks to negotiate a better deal. According to a Detroit Free Press article on yesterday's ruling, Detroit and the banks renegotiated the dollar figure on the deal on Christmas Eve, down to $165 million (43 percent). Judge Rhodes rejected this deal Thursday, because the figure is still much too high, and, on the other hand, it's "reasonably likely" the City would succeed in challenging the legality of the original transaction. He said, according to the Free Press, that "the City has convincing arguments that its 2009 decision to pledge its casino taxes as collateral on the transaction was illegal under the Michigan Gaming Act, which limits how the money can be used. He also said the City has a strong argument that the swaps were invalid altogether." He told the City and the banks to renegotiate again.

Along with this ruling, he rejected the request by the City to borrow the $165 million from Barclay's, but approved, with conditions, a proposal to borrow $120 million from them to improve city services. The funds from the approved loan "can't be used as 'working capital' and can only be used for functions approved by the Michigan Gaming Act," according to the Free Press

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