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Detroit Said to Demand New Swaps Deal From BofA, UBS

Buildings Stand in the Skyline of Detroit
In July, Detroit filed the biggest U.S. municipal bankruptcy after decades of decline, saying it couldn’t pay creditors while also providing basic city services. Photographer: Jeff Kowalsky/Bloomberg

Jan. 31 (Bloomberg) -- Detroit officials gave Bank of America Corp. and UBS AG until the end of today to say how much they would accept to cancel interest-rate swaps that cost city taxpayers about $4 million a month or face a possible lawsuit, a person familiar with the talks said.

The city and the banks have been trying to negotiate a new deal since a federal judge rejected a proposal to pay the banks $165 million to end the swaps. Should the banks make a low enough offer today, the city will keep talking through the weekend in hopes of presenting a new deal to U.S. Bankruptcy Judge Steven Rhodes in Detroit, said the person, who asked not to be identified because the discussions are private.

Without a deal, the city will consider taking legal action to have the swaps declared illegal and to prevent the banks from seizing about $4.2 million in casino taxes held in a custodial account, the person said. The city has paid more than $200 million on the swaps since 2009.

Rhodes this month rejected the $165 million proposal, which was a reduction from an earlier agreement to pay $230 million, as “too high a price.” He advised Detroit to seek better terms.

Bill Halldin, a spokesman for Bank of America, declined to comment on the swaps negotiations. Megan Stinson, a spokeswoman for UBS, didn’t immediately return an e-mail seeking comment after regular business hours.

Manager Setback

The judge’s rejection of the deal was a setback for Kevyn Orr, Detroit’s emergency financial manager, who said Jan. 29 that he will soon submit to Rhodes a plan to adjust about $18 billion in debt. Creditors have received a draft of that plan, Orr said this week.

In July, Detroit filed the biggest U.S. municipal bankruptcy after decades of decline, saying it couldn’t pay creditors while also providing basic city services. Orr has been in court-supervised mediation with creditors including bondholders and pension funds to see if they can reach an agreement on cuts.

Under the 2009 swaps agreement, the banks have the right to seek control of Detroit’s casino taxes, which the city pledged as collateral. To prevent the banks from seizing the money, Orr may need to file an emergency request with the court.

Pension Bonds

The swaps are tied to pension obligation bonds issued in 2005 and 2006. They were designed to protect against rising interest rates by requiring the banks to pay the city if rates climbed above a certain level. When rates fell, Detroit was required to make monthly payments.

Days before filing for bankruptcy, Detroit agreed to pay $230 million to end the swaps contracts, which a city service corporation signed with Zurich-based UBS and SBS Financial Products Co. Merrill Lynch, a unit of Charlotte, North Carolina-based Bank of America, took over the SBS position in July.

Creditors led by bond insurer Syncora Guarantee Inc. opposed settlement. The city didn’t prove it would lose if it sued to cancel the swaps contracts instead of settling with the banks, Syncora said.

Rhodes suspended a December trial over the $230 million settlement and told the city to renegotiate. On Dec. 24, Detroit announced the deal that reduced the termination payment to $165 million, which Rhodes rejected.

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: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

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

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