04.11.14

One More Lap. U.S. Bankruptcy Judge Steven Rhodes this morning approved the Motor City’s $85 million settlement of its troubled pension-related debt with two banks — UBS AG and Bank of America, finding the third time a charm. Judge Rhodes called the proposal “entirely reasonable” noting it “fairly compromises all the claims between the parties,” finding that each of the objections “lack merit.” His decision clears the way for the Motor City to pay UBS AG and Bank of America $85 million to settle a swap agreement on interest rates that went south on the city in 2008-09, causing initially low annual payments to balloon to $50 million. The decision also matters, because of the city’s 2009 pledge of its casino tax revenue as collateral on the swaps, jeopardizing the city’s most dependable source of cash. This morning’s decision—which came after Judge Rhodes in December and January rejected proposed settlements of $230 million and $165 million respectively—terming them too generous, also marks another key breakthrough, as the two banks have pledged to vote for Emergency manager Kevyn Orr’s plan of adjustment—a pledge which provides Detroit with an impaired class of creditors, which could provide for a cram down on other creditors. A number of such creditors, including Detroit’s retiree committee, AFSCME, European banks, and municipal bond insurers Syncora and FGIC had, in fact opposed this morning’s settlement. Because the interest rate swaps at issue are valued at about $272 million, Detroit not only will save about $187 million, but also achieve a second consecutive breakthrough towards exiting municipal bankruptcy, and alleviate the lien the banks hold on $170 million in annual casino revenue that affect the Motor City’s monthly cash flow. Under the settlement, Detroit is to continue to make $4.2 million monthly payments on the swaps until it exits municipal bankruptcy—after which it might be forced to borrow or issue debt in order to finance the remainder. Under the terms of the settlement, the banks’ lien on the casino taxes will remain in place until the city pays them the $85 million.

Never a Dull Moment. Wayne County filed a motion today asking U.S. Bankruptcy Judge Steven Rhodes to appoint a mediator to bring recalcitrant neighbors Oakland and Macomb Counties back to the negotiating table on forming a regional water authority to manage the Detroit Water and Sewerage Department.

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