Detroit Allowed to Pay UBS, BofA $85 Million to End Swaps

Detroit won permission to pay UBS AG and Bank of America Corp. about $85 million to cancel interest-rate swaps, a deal that may help the city speed the end of the biggest-ever U.S. municipal bankruptcy.

U.S. Bankruptcy Judge Steven Rhodes said today he will approve Detroit’s third attempt at a settlement with UBS and Bank of America’s Merrill Lynch unit. The swaps have cost Detroit taxpayers about $200 million since 2009.

“The settlement is entirely reasonable,” Rhodes said at a hearing in federal court in Detroit.

Detroit has tried for months to win court approval of a deal to end the swaps. An agreement to pay $230 million was put together in July, just days before the city filed for bankruptcy with $18 billion in debt, saying it couldn’t pay creditors and still provide vital services to its almost 700,000 residents. Even after the payment was pared to $165 million, Rhodes rejected it in January as too costly.

Without the deal, the city might have been forced to pay about $288 million to cancel the swaps contract, or sue Zurich-based UBS and Charlotte, North Carolina-based Bank of America with the goal of winning a court ruling that the swaps are illegal.

The $85 million deal, part of emergency manager Kevyn Orr’s program to restructure Detroit’s finances, was opposed by creditors including Syncora Guarantee Inc., which insures some of the city’s debt.

Plan Vote

Under the swaps accord, UBS and Merrill Lynch agreed to vote their impaired Detroit claims in favor of the city’s debt-adjustment plan. Detroit is set to seek court permission later this month to organize a creditor vote on the plan.

The city has proposed cutting general employees’ pensions by about one-third, while police and firefighters would see their pensions reduced by as much as 14 percent. Retiree cuts will be less severe if they vote in favor of the plan. Municipal unions and pension systems have objected to the cut.

Rhodes today urged creditors to compromise before it’s too late and criticized “an extensive public relations campaign” by parties in the bankruptcy case.

‘Best Interest’

“Is this really in their best interest, or is it counter-productive?” Rhodes asked. “This case is not about who wins in the court of public opinion.”

At a hearing earlier this month, Rhodes urged the city to reach out to local Detroit reporters to correct stories that he said were in error.

Earlier this week, mediators announced an agreement to pay 74 percent of the $388 million owed to some bondholders. The city would use about $50 million of the savings to keep retired workers above the federal poverty line.

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

Orr and other officials have said that after decades of decline and the near-disappearance of manufacturing jobs, city services including street lighting, trash pickup and emergency services are inadequate.

About 60,000 properties, or 15 percent of all parcels in the city, were barren, and at least 78,000 buildings were vacant, including 38,000 deemed potentially dangerous, Orr said in a report last year.

In December, Detroit won court approval to divert some tax revenue to a lighting authority that would borrow more than $200 million to replace thousands of broken streetlights.

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.