Story first appeared on DetroitNews.com.
Detroit — Emergency Manager Kevyn Orr and lawyers for two banks reached a new $165 million agreement Tuesday for terminating a pension debt deal blamed for plunging Detroit into bankruptcy.
The new agreement saves Detroit an additional $65 million and was announced in court this morning before Chief U.S. District Judge Gerald Rosen, who is the lead mediator in Detroit’s bankruptcy case. The city spent two days trying to reach more favorable terms for ending the pension deal as part of a settlement seen as crucial to Orr's overall plan to shed billions in city debt.
“It's the first, I think it's fair to say, significant agreement in the bankruptcy,” Rosen said today, according to a court transcript. “We understand this has been difficult for everybody and we appreciate it.”
The deal must be finalized by Jan. 31 and approved by U.S. Bankruptcy Judge Steven Rhodes. It was unclear whether bond insurers and others who objected to the original $230 million deal will fight the new agreement.
“We are very pleased and hope that this is a change that Judge Rhodes is happy with,” lead Detroit bankruptcy lawyer David Heiman said Tuesday outside federal court before climbing into a taxi.
Asked if he was happy about reaching the deal early on Christmas Eve, he simply said: “Yes.”
Mediation talks have been private and security guards were stationed outside Rosen’s courtroom Tuesday morning. Rosen ordered the city, banks and bond insurers to meet Monday and on Christmas Eve to negotiate a deal that could free up money for restructuring.
In all, Detroit will save $128 million by terminating the troubled debt deal reached during ex-Mayor Kwame Kilpatrick’s tenure. That represents a 43 percent savings, according to Orr.
The settlement means Detroit won’t have to borrow as much money to pay off two banks, UBS and Bank of America. Instead of borrowing $350 million from London-based Barclays, the city will borrow $288 million.
Detroit will pay $165 million to the banks and spend $120 million on basic city services, including blight removal, updating city information technology and other “quality of life” improvements.
“This is an important development for the city and its residents because it means we can start moving forward on implementing needed investments in public safety and services,” Orr said in a statement Tuesday.
The negotiation sessions were ordered late last week after Rhodes expressed concern about Detroit’s plan to pay two banks up to $230 million to end an interest rate swap arrangement. Rhodes questioned whether the deal was fair to other city creditors.
“Clearly they were sent a message and they listened to what Judge Rhodes had to say – that he wasn’t going to approve it,” said Douglas Bernstein, a Bloomfield Hills attorney and expert on municipal bankruptcy. “Absent that push, nobody would have done anything and they would have had to fight it out with the other creditors.”
The renegotiated deal comes three weeks after Rhodes ruled that Detroit is eligible for Chapter 9 bankruptcy relief and said pensions can be cut in bankruptcy court.
“This is an indication that Detroit, at least for now, is starting to follow the same pattern as bankruptcies in other cities in that once you get by the eligibility dispute, settlements fall into place,” Bernstein said.
Before Rhodes raised his concern, Detroit proposed borrowing $350 million from Barclays. Orr wants to use most of the loan to pay off UBS and Bank of America for a hedge owed on interest rate swaps tied to $1.44 billion in 2005-06 pension debt.
A city banking consultant Friday said Detroit’s legal team was engaged in “extraordinarily active” negotiations with the banks to lower the swap settlement amount. Based on the value of the swaps, which is calculated based on increasing interest rates, Detroit could owe UBS and Bank of America $200 million if the city pays the banks 75 cents on the dollar, said James Doak, managing director at the consulting firm Miller Buckfire.
Several groups had objected to the initial deal, arguing it gave banks a greater payout than other creditors. Orr has proposed paying pensioners as little as 20 cents on the dollar.
Rhodes halted a trial Wednesday to determine whether Detroit could borrow the money and settle the swaps debt before presenting its debt-cutting plan of adjustment.
The judge scheduled the trial to continue Jan. 3.
A two-day trial last week focused on a soured loan deal Kilpatrick’s administration used to pump $1.44 billion into pension funds in 2005 and 2006. The deal included an interest rate swap piled on $800 million of pension debt, court records show.
Detroit’s interest rate swaps with UBS and Bank of America were supposed to protect the city from rising interest rates. But the deal soured for Detroit when prevailing interest rates plummeted in 2008-09, causing the city’s annual payments on the swaps to rise to $50 million.
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