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Detroit Said to Reduce Swaps Debt by 25% in Deal With Banks

Detroit Emergency Financial Manager Kevyn Orr
In a June 14 report, Detroit Emergency Financial Manager Kevyn Orr proposed paying off $11.5 billion in unsecured debt with $2 billion of newly borrowed money, while he suspended payments on some debt. Photographer: Jeff Kowalsky/Bloomberg

Bank of America Corp. and UBS AG would accept 75 cents on the dollar from Detroit on $343.6 million in swaps liabilities in a deal with Kevyn Orr, the city’s emergency financial manager, according to a person familiar with the negotiations.

The city would refinance the remaining debt and would be guaranteed to receive about $11 million a month in casino-tax revenue, according to the person, who asked not to be identified because the negotiations are private.

Orr wants to sign the agreement as early as today and continue talks with other creditors and employee unions to avoid the largest U.S. municipal bankruptcy, the person said.

Bill Nowling, Orr’s spokesman, didn’t immediately return a phone call and e-mail seeking comment. William Halldin, a spokesman for Charlotte, North Carolina-based Bank of America, said in an e-mail there was no comment.

Megan Stinson, a New York spokeswoman for Zurich-based UBS, declined to comment on the deal.

In a June 14 report, Orr proposed paying off $11.5 billion in unsecured debt with $2 billion of newly borrowed money, while he suspended payments on some debt. The plan didn’t include the swaps agreements, which were tied to the city’s issuance of $1.4 billion in pension-obligation certificates in 2005 and 2006.

Betting Houses

The swaps were a bet on the direction of interest rates. Because rates fell rather than increasing, the city owes the banks. Under the terms of the contracts, cuts to the city’s credit ratings allowed the companies to demand the money.

Under agreements in 2009, the city pledged casino revenue to cover the payments.

Orr gave the swaps payments, as secured debt, priority over retirees and holders of unsecured debt, including the pension borrowings. While swaps holders would take a 25 percent cut in payments, other creditors would receive much less.

In all, Detroit has more than $17 billion in long-term debt, which includes such secured debt as bonds for the city’s water and sewer system, Orr has said.

The casino money prompted a legal clash between Orr and Syncora Guarantee Inc., which insures both the swaps agreements and the $1.4 billion in certificates sold to shore up Detroit’s pension system. Syncora sought to keep casino revenue when the city defaulted on a $39.7 million payment on the debt June 17.

Orr sued Syncora July 5, then on July 14 dropped his demand for a restraining order as talks progressed toward a deal with the swaps holders.

Orr also has proposed reducing payments to pension funds and switching retirees from city-paid health insurance to federal health-care programs.

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