Detroit Strikes New Swap Accord with Banks

If approved, settlement will get bankrupt city out of $288 million in swaps contracts originally bought to protect pension plan against rising interest rates.

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 taxpayers more than $200 million since 2009, according to a court filing in the city’s bankruptcy.

The settlement, which is a 70 percent reduction in the amount the city was liable for under the 2009 agreement, will release Detroit from claims by the banks and provide “greater certainty with respect to the city’s cash flows and liquidity,” Detroit’s attorneys 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, the lawyers said.

“The settlement also contains an agreement by the swap counterparties to vote their impaired claims in favor of a plan of adjustment,” the city said in the filing.

Rhodes in January rejected as too costly a proposal by the city to pay $165 million. Under the 2009 swaps agreement, the banks have the right to seek control of Detroit’s casino taxes, which the city pledged as collateral.

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.

Detroit owed $288 million under the swap agreement. The city will pay another $85 million once it emerges from bankruptcy if it’s able to raise exit financing. If financing isn’t found, it will get another 180 days to repay any remaining balance, according to the filing.

Rhodes has scheduled a June trial where Detroit officials will seek approval of the city’s debt-reduction plan.

Detroit filed a record $18 billion municipal bankruptcy in July, saying decades of economic decline had left it without enough money to pay creditors and still provide basic services.

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

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