Detroit Manager Says City May Exit Bankruptcy by October

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Detroit’s emergency financial manager, Kevyn Orr, said the city may be able to conclude its record $18 billion bankruptcy in October, less than 18 months after seeking court protection from creditors.

Orr told U.S. Bankruptcy Judge Steven Rhodes today that Detroit was “hoping” to exit by Oct. 15. Michigan’s biggest city filed for bankruptcy in July after decades of decline, saying it couldn’t pay creditors while also providing essential services to its 700,000 residents.

The emergency manager was in court today to seek approval of an $85 million settlement with UBS AG and Bank of America Corp. to end interest-rate swaps that have cost taxpayers $200 million since 2009. He testified that by Jan. 31, after earlier settlements fell through, he was prepared to sue if the banks didn’t accept less than $100 million.

Orr said he instructed his negotiating team to tell the banks: “You’ve got to be below 100 to be serious.”

Rhodes said he would announce his decision on the settlement at an April 11 hearing.

He said he canceled plans for a lawsuit after the banks agreed to negotiate a lower amount. Both sides agreed on the $85 million payment, in installments, to end swaps that normally would have cost the bankrupt city $288 million to terminate.

Creditors Object

Syncora Guarantee Inc., which insures some city debts, objected to the swaps settlement, saying the new agreement violates its legal rights related to the swaps. Other creditors say the city should sue Zurich-based UBS and Charlotte, North Carolina-based Bank of America to cancel the swaps and recover as much as $300 million Detroit paid under the contracts.

After UBS and Bank of America collect the $85 million from the city, they can try to collect insurance from Syncora, Stephen Hackney, an attorney for the bond insurer, told Rhodes.

As one of the insurers for the swaps payments, Syncora has the right to veto any changes in the swaps contracts, Hackney said.

The city argues that the original swaps deal isn’t being modified. Instead, UBS and Bank of America are simply settling the bankruptcy claim they would have if the contract was terminated. Once the $85 million has been paid, UBS and Bank of America will release their collateral rights to $170 million in annual casino taxes, according to the agreement.

Payment Plan

Orr said the swaps settlement assumes the city may exit bankruptcy by Oct. 15. If it hasn’t paid all $85 million by then, the banks can collect interest on the balance. Detroit will have 180 days after exiting bankruptcy to complete the payments.

Earlier today, a city financial adviser, Gaurav Malhotra of Ernst & Young, said Detroit may borrow $230 million to $300 million when it exits bankruptcy. The money could be used to pay off any swaps balance and for operating city services.

The swaps are one of the many issues Orr is trying to resolve before September, when the city council can remove him from his post. Unions and retiree groups have objected to Orr’s proposal to cut pensions for public workers. The city has also said it plans to pay some bondholders 15 cents on the dollar.

In January, Rhodes rejected as too costly a proposal to pay $165 million to end the swaps. That was down from a deal reached days before the city’s bankruptcy filing to pay $230 million.

The swaps, tied to pension obligation bonds issued in 2005 and 2006, were designed to protect against rising interest rates by requiring the banks to pay the city if rates rose above a certain level. Instead, rates fell, forcing the city to pay about $4 million a month.

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