Detroit Judge Rejects $165M Swaps Deal With UBS, Bank of America as Too Costly
Jan. 16 –A Detroit bankruptcy judge Jan. 16 denied the city permission to pay UBS AG and Bank of America Corp. about $165 million to end interest-rate swaps that have cost taxpayers $202 million since 2009, saying the deal cost too much (In re City of Detroit , Bankr. E.D. Mich., No. 2:13-bk-53846, 1/16/14).
U.S. Bankruptcy Judge Steven Rhodes called the $165 million payment plus a fee of more than $4 million “too high a price” to win his approval for a settlement with UBS and Bank of America’s Merrill Lynch unit. “The court will not let the city continue hasty decisions,” the court said. It is not in the best interest of Detroit to “enter into bad deals” to solve its financial problems, he said.
Days before Detroit filed the biggest U.S. municipal bankruptcy, it reached a deal to pay $230 million to terminate the swaps contracts, which a city service corporation signed with Zurich-based UBS and SBS Financial Products Co. Merrill Lynch, a unit of Charlotte, N.C.-based Bank of America, took over the SBS position in July.
The city’s emergency manager, who proposed the settlement, is discussing options for his next step with advisers, his spokesman, Bill Nowling, said in an e-mail.
The options include suing UBS and Bank of America in an effort to have the swaps contracts declared void, which creditors said the city should have considered more seriously before trying to settle with the banks.
Bill Halldin, a spokesman for Bank of America, and Megan Stinson, a UBS spokesman, declined to comment on the ruling.
Under a 2009 agreement, the banks have the right to seek control of the city’s casino taxes. The city pledged that cash to the banks as collateral under the agreement. To prevent the banks from seizing the money, the city may need to file an emergency motion asking the court to protect the cash.
The banks argued in court papers that their swaps claims are protected by what is known as the safe harbor provisions of the U.S. Bankruptcy Code. Those provisions make it easier for certain kinds of collateral to be seized by creditors, even when a debtor is in bankruptcy.
The city wanted to buy out the swaps contracts to avoid the risks of a lawsuit and to free casino taxes, one of Detroit’s best sources of revenue, from being threatened by UBS and BoA.
Rhodes suspended a December trial over the first version of the settlement and told the city to try to renegotiate the terms. On Dec. 24, Detroit announced a new deal that reduced the termination payment to $165 million. To pay for the swaps settlement and other projects, the city had asked the judge to approve a $285 million loan. The court approved only $120 million of it, which would be used to improve city services.
Creditors led by bond insurer Syncora Guarantee Inc. opposed the settlement, saying it was too costly. The city did not prove it would lose if it sued to cancel the contracts instead of settling with the banks, Syncora said.
At a hearing on Jan. 13, Ryan Bennett, a Syncora attorney, argued that the loan doesn’t benefit the city’s other creditors and that any deal on the swaps should be approved as part of a larger bankruptcy exit plan.
“We don’t see an imminent threat” to city services, Bennett said.
Detroit has paid about $202 million on the swaps, according to city records.
In a previous hearing, a Merrill Lynch attorney, Mark C. Ellenberg, called the settlement “extremely beneficial to the city.”
Detroit filed a record $18 billion municipal bankruptcy in July, saying decades of economic decline had left it without enough money to pay creditors and still provide services to about 700,000 residents. The city’s five percent sewer bonds that mature in 2025 fell nearly 3 percent to 85.57 cents on the dollar after Rhodes’s ruling, according to data compiled by Bloomberg.
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