UBS AG, Switzerland’s largest bank, was sued by bond insurer Syncora Guarantee Inc. over interest-rate swaps tied to $1.4 billion of Detroit pension debt.
Syncora, which backs the pension-related liabilities at issue in the suit, seeks to block termination of the swaps, which would expose Syncora to the cost of rising interest rates, according to a complaint filed yesterday in New York State Supreme Court.
“That risk to Syncora is particularly acute in the current environment when interest rates are on the rise and the protection against rising interest rates is thus of paramount importance,” the insurer said.
The lawsuit comes after Detroit filed the largest municipal bankruptcy in history on July 18, with emergency manager Kevyn Orr saying that six decades of economic decline had left the city unable to pay debt and provide residents necessary services.
Detroit owes $18 billion to creditors, including $3.5 billion in underfunded pension liabilities and $1.4 billion in liabilities under pension certificates of participation, according to court papers.
The certificates were issued to investors to fund pension shortfalls. The swaps were entered into with UBS and SBS Financial Products to hedge interest-rate risk. Swap liabilities tied to the certificates are $296.5 million, according to court documents filed in Detroit’s bankruptcy case. Under a July 15 agreement with the city, the swaps can be terminated.
“Syncora has serious and well-founded concern that that the swap counterparties will soon purport to terminate the swap agreements without having obtained Syncora’s required consent,” the Hamilton, Bermuda-based insurer said in the complaint.
SBS Financial, created by some owners of New York-based Siebert Brandford Shank & Co., provides swap agreements to the bank’s clients. Through a credit agreement, Merrill Lynch & Co. backed up SBS under the Detroit contracts.
“We were well within our rights under the swap contracts to enter into the agreements with the city of Detroit,” Bill Halldin, a spokesman for Charlotte, North Carolina-based Bank of America Corp., the parent company of Merrill Lynch, said in a statement.
UBS and SBS didn’t immediately respond to voice-mail messages seeking comment on the suit.
In 2009, UBS and SBS could have forced the city to pay a fee to end the agreements, which were designed to cut the cost of the debt. Instead, the firms struck a deal giving them a claim on Detroit’s gambling-tax revenue, guaranteeing they will get paid $50 million a year.
The case is Syncora Guarantee Inc. v. UBS AG, 652606/2013, New York State Supreme Court, New York County (Manhattan).