The city of Detroit has agreed to pay Bank of America Corp.’s (BAC) Merrill Lynch (MER) and UBS AG (UBSN) $85 million as part of a settlement to end interest-rate swaps, which taxpayers have had to pay over $200 million for in the last four years. Now, US Bankruptcy Judge Steven Rhodes must decide whether to approve the deal.
The swaps involved are connected to pension obligation bonds that were issued in ’05 and ’06. They were supposed to protect the city from interest rates going up by making banks pay Detroit if the rates went above a certain level. Instead, the rates went down, and Detroit has owed payments each month.
Under the swaps deal, the city owed $288 million. The settlement reduces the amount by 70%, which should help, as Detroit had to file for protection last year over its $18 billion bankruptcy.
The decision by the banks to support the settlement grants the city the legal authority to ask Judge Rhodes to implement its restructuring plan despite creditors’ objections. However, according to Detroit’s legal team, which submitted a in a court filing, the city won’t necessarily choose to exercise that option.
The swaps agreement, however, will liberate more funds so that Detroit has the ability to make more consensual deals with creditors. If a deal had not been reached, the city might sued Bank of America and UBS to protect its casino tax revenues, which are collateral for the interest-rate swaps.
It was just in January that Judge Rhodes rejected another proposed deal. Detroit had proposed to pay $175 million—a 43% reduction from the obligation it owed. Rhodes, however, said the price was too high for the city. However, the judge said that it would be better for the city to settle than get embroiled in expensive litigation. Judge Rhodes had also rejected an earlier proposed agreement, in which the city would have paid $230 million.
Now, seeking Rhodes approval once more, Detroit submitted its filing arguing that the deal with Merrill Lynch Capital Services and UBS could help it gain the federal court approval needed for a plan to leave bankruptcy and deal with its debt.
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Detroit reaches settlement over controversial debt deal, USA Today, March 4, 2014
U.S. judge rejects deal to end Detroit rate swap accords, Reuters, January 16, 2014
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