Detroit’s Swaps Deal With Banks Receives Mediator’s Approval

Detroit’s accord to end interest-rate swap contracts with UBS AG (UBSN) and Bank of America Corp., cutting about $65 million from the termination amount, should be approved, a mediator told a judge.

The settlement will allow Detroit to reduce the loan it took out to finance operations in bankruptcy and provide “much needed financial flexibility,” the mediator, U.S. District Judge Gerald Rosen in Detroit, said in a filing today in the city’s bankruptcy court, which must approve the deal. The next hearing in the case is scheduled for Jan. 3.

“Although it is not a perfect settlement, the mediators believe that, in the interest of all parties, it represents a fair and equitable solution that is advantageous to all concerned,” Rosen said in the filing. “We believe this settlement is a significant first step in the resolution of Detroit’s bankruptcy.”

Detroit filed a record $18 billion municipal bankruptcy in July, the biggest in U.S. history, saying decades of economic decline had left it without enough money to pay creditors and still provide services to about 700,000 residents.

U.S. Bankruptcy Judge Steven Rhodes on Dec. 18 suspended a trial over an earlier settlement, under which the city would have paid UBS and BofA’s Merrill Lynch unit $230 million to terminate interest-rate swaps that have cost the city about $202 million since 2009. Under the new deal, the contracts can be broken for $165 million.

Casino Taxes

Buying out the contracts will keep casino taxes, one of Detroit’s best sources of revenue, from going to the banks, Corinne Ball, a lawyer for the city, told Rhodes Dec. 17. The swaps are linked to $1.4 billion in pension obligation bonds the city issued in 2005 and 2006.

The accord will free up casino revenues held in a collateral account, allowing the funds to be used to maintain operations and bolster city services, Rosen said in the filing.

“As for the swap counter-parties, it will enable them to avoid the risk of losing all that they invested and further avoid the lawsuit the city threatened to bring which, if successful, could have forced them to disgorge and pay back to the city all of the payments they received under the swaps,” Rosen wrote.

The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

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