Detroit to Pay $77 Million in Swaps Accord With UBS, BofA

Detroit agreed to pay $77.6 million to UBS AG and Bank of America Corp.’s Merrill Lynch unit to end interest-rate swaps that have cost the bankrupt city’s taxpayers more than $200 million since 2009.

The settlement, which is a 70 percent reduction of what the city was liable for under the swaps agreement, will release Detroit from claims by the banks and provide “greater certainty with respect to the city’s cash flows and liquidity,” Detroit said in a filing yesterday seeking approval for the accord from U.S. Bankruptcy Judge Steven Rhodes. The payments will be made over time, rather than in a lump sum, according to the filing.

“We appreciate the banks’ willingness to work with us to reach a solution that we think balances our goal to provide realistic recoveries to creditors while freeing up critical funds that we can invest to improve the quality of life in Detroit,” Kevyn Orr, the city’s emergency financial manager, said in a statement. “We hope the ‘swaps’ resolution serves as a model for compromise on other matters.”

The agreement, if approved, removes one obstacle in the city’s record $18 billion municipal bankruptcy. Detroit last month submitted a debt-adjustment plan to the court that offers bondholders about 20 cents on the dollar for their claims and reduces payments on general employees’ pensions by about one-third. Rhodes set a June trial on plan approval.

Favorable Vote

The settlement with the banks contains an agreement by the swap counterparties to vote their impaired claims in favor of the plan, the city said in the filing.

Detroit owed $288 million under the swap agreement. Rhodes in January rejected as too costly a proposal by the city to pay $165 million to terminate the swaps. That was a reduction from a deal reached in July, days before the city’s bankruptcy filing, to pay $230 million to end the swaps.

Under the 2009 swaps agreement, the banks had the right to seek control of Detroit’s casino taxes, which the city pledged as collateral. With the settlement, the city won’t have to hold any of those funds in a disputed-claims reserve for the benefit of swap counterparties, according to yesterday’s filing.

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 rose above a certain level. When rates fell, Detroit was required to make monthly payments. The agreement is with Zurich-based UBS and Merrill Lynch, a unit of Charlotte, North Carolina-based Bank of America.

After Detroit emerges from bankruptcy, the city will pay any unpaid balance on the settlement if it’s able to raise exit financing. If financing isn’t found, Detroit will get 180 more days to repay any remaining balance, according to the filing.

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

Before it's here, it's on the Bloomberg Terminal.