Detroit shouldn’t be allowed to pay $165 million to UBS AG (UBSN) and Bank of America Corp. under a renegotiated deal to end interest-rate swaps because the new agreement is still too costly, Ambac Assurance Corp. said.
The city could instead sue the banks and, should they win, pay nothing or even collect damages for previous payments related to the swaps, Ambac, a bond insurer, said in a filing today in U.S. Bankruptcy Court in Detroit. The swaps and a related promise by the city to use casino taxes to guarantee payments to the banks violate state law, according to Ambac.
The new proposal, which was announced Dec. 24 and would cost the city about $65 million less than the original deal, “is still far too rich given the strong and unrefuted arguments that the swap obligations and the pledge of casino revenue to the swap counterparties are void,” Ambac said.
Detroit is scheduled to ask U.S. Bankruptcy Judge Steven Rhodes tomorrow to approve the proposed settlement. Last month, Rhodes questioned the original deal and ordered top officials from the city and the banks to appear in Detroit on Christmas Eve for a new round of negotiations.
The mediator that presided over the talks endorsed the new settlement, saying it was in the best interest of all the parties involved. Creditors opposed to the original deal claimed the city was paying money that could be used to reduce their debts instead.
Detroit filed for bankruptcy in July, listing about $18 billion in debt and saying it couldn’t meet obligations to creditors and still provide essential city services. The first agreement with the banks to terminate the interest-rate swaps was reached days before the bankruptcy filing.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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