Detroit may have to sue UBS AG and Bank of America Corp. (BAC) if the banks don’t make more concessions in a $230 million swaps settlement, a lawyer for the city told a judge, saying talks would continue through Dec. 24.
The city would be forced to sue to protect one of its most stable sources of revenue, casino taxes, Thomas F. Cullen Jr., an attorney for the city, said in court today. The tax proceeds serve as collateral for the interest-rate swaps that Detroit is seeking to cancel through a proposed settlement it reached shortly before it filed for bankruptcy.
U.S. Bankruptcy Judge Steven Rhodes on Dec. 18 suspended a trial over the original settlement, under which the city would pay UBS and BofA’s Merrill Lynch unit $230 million to terminate interest-rate swaps that have cost the city about $202 million since 2009. To fund the settlement, the city wants to borrow $350 million and use the extra money for restructuring projects.
The main goal of the mediation “is to get this done as soon as possible,” Cullen told Rhodes. “We will litigate our rights if an agreement is not reached.”
Creditors led by bond insurer Syncora Guarantee Inc. oppose the swaps settlement, saying it’s too costly. The city hasn’t proved it would lose if it sued to cancel the contracts instead of settling with the banks, Syncora said.
Detroit filed the biggest U.S. municipal bankruptcy in July, saying it was unable to pay about $18 billion in debt and still provide basic services to 700,000 residents.
Days before it filed, the city reached a deal with the banks to terminate the swaps contracts, which a city service corporation signed with Zurich-based UBS (UBSN) and SBS Financial Products Co. Merrill Lynch, a unit of Charlotte, North Carolina-based Bank of America, took over the SBS position in July.
A Michigan loan board today approved the city’s proposal to borrow $350 million to fund any settlement with UBS and Bank of America, the state Treasurer’s office said in a statement. The loan must be approved by Rhodes before it is final.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).