Detroit Bond Insurer Syncora May Fight Latest Swaps DealSteven Church
Syncora Guarantee Inc. threatened to put another obstacle in the way of Detroit’s efforts to cut debt through bankruptcy by saying it may oppose the city’s plan to pay $85 million to end interest-rate swaps.
Syncora, which insures some Detroit bonds, derailed a previous attempt by the city to get out of the swaps contracts with UBS AG and Bank of America Corp.’s Merrill Lynch unit. A lawyer for the New York-based company told U.S. Bankruptcy Judge Steven Rhodes in Detroit yesterday that his client has reservations about the latest plan as well.
“There is a likelihood that we will object,” said the attorney, Stephen C. Hackney. “We have real concerns.”
Rhodes in January rejected as too costly a proposal to pay the banks $165 million to end the swaps, which have cost taxpayers about $200 million since 2009. Under an agreement announced this month, the city would pay $85 million in installments to the banks, in exchange for their endorsement of Detroit’s plan to adjust $18 billion in debt.
Detroit filed for bankruptcy on July 18 after decades of decline, saying it couldn’t pay creditors while also providing basic city services. The city’s emergency financial manager, Kevyn Orr, has been in court-supervised mediation with creditors including bondholders and pension funds to seek an agreement on cuts.
The way Rhodes rules on the latest swaps deal will affect how the city attempts to resolve its bankruptcy, Detroit attorney Robert S. Hertzberg told the judge yesterday.
“It drives the plan,” Hertzberg said.
The judge said he’ll announce a schedule for a trial over the latest swaps proposal in a few days. He didn’t comment on the deal or say whether he will accept the city’s suggestion that he hold a five- or six-hour trial on the proposal this month.
The swaps 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.
Syncora guarantees some of the swaps payments and has also written bond insurance on part of the $1.4 billion in pension debt underlying the swaps. The city in January sued to cancel the pension debt. That lawsuit didn’t seek to cancel the swaps themselves.
The swaps contracts give the banks the right to seek control of Detroit’s casino taxes, which the city pledged as collateral, in the event of a default. In December, Corinne Ball, a lawyer for the city, told Rhodes the casino revenue was one of Detroit’s best sources of money.
Detroit’s 5 percent water bonds that mature in 2033 opened higher this morning, climbing more than 2 percent to 99.5 cents on the dollar, according to data compiled by Bloomberg.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).