Traverse City Record-Eagle

Michigan

April 12, 2014

Judge OKs Detroit swaps deal with two banks

DETROIT (AP) — Detroit can move ahead with a plan to settle a ruinous multimillion-dollar debt with two banks for $85 million, a judge said Friday as he also urged the bankrupt city and other creditors to reach more deals.

Bankruptcy Judge Steven Rhodes signed off on the agreement to pay UBS and Bank of America.

The settlement is just a small portion of the city’s $18 billion in liabilities, which include $12 billion not secured by taxes or other revenue.

Each bank will get $42.5 million spread out over a number of years — a “reasonable” amount, Rhodes said.

The city said in a release Friday afternoon that it already has paid about $12 million of the $85 million owed the banks.

Rhodes said the plan reduces the amount of principal owed to the banks and extends the time to pay what’s left. The agreement also doesn’t require a new loan, he said.

Rhodes had denied earlier proposals for $220 million and $165 million as too generous.

Detroit had pledged casino tax revenue in 2009 as collateral to avoid defaulting on pension debt payments. It allowed the city to get fixed interest rates on pension bonds with the banks, but the arrangement became too costly when interest rates plunged.

The city had owed $288 million on the so-called swaps deal, made in 2005 and 2006.

The settlement is important in emergency manager Kevyn Orr’s plan to restructure Detroit’s debt and get the city out of bankruptcy by mid-October. It gives Orr momentum and could eventually persuade the judge to order a “cram-down” on other creditors, especially retirees, if they don’t make their own deals.

“Now is the time to negotiate,” Rhodes said. “Litigation should be a last resort.”

Under a cram-down, Rhodes can approve a bankruptcy exit plan if, among other things, it’s been accepted by certain creditors.

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