Detroit bankruptcy judge ok's swaps settlement; says "now is the time to negotiate"

Apr 11, 2014

Judge Steven Rhodes approved a key settlement in Detroit’s historic bankruptcy case Friday.

The deal will settle a costly interest-rate swaps agreement with two banks, UBS and Bank of America, for $85 million.

Emergency manager Kevyn Orr has pushed hard for such a deal. Detroit had guaranteed the swaps with casino revenue, and paid out about $200 million since 2009.

Now, the city will get direct access to its casino revenues—money Orr says is crucial to Detroit’s restructuring in bankruptcy. The city will pay the banks $4.2 million a month until 2015.

This was the city’s third attempt to settle the matter. Judge Rhodes had rejected two previous settlement offers as overly-generous to the banks.

Some creditors, including a major bond insurer and a committee representing city retirees, objected to the deal.

They argued that the underlying financial transaction was illegal to begin with. And they said state law prohibited using casino revenues as loan collateral.

But Doug Bernstein, a bankruptcy attorney with the law firm Plunkett Cooney, says Judge Rhodes was right to reject those arguments.

Bernstein says it essentially doesn’t matter if the underlying transactions are legally disputed.

“That’s what settlements are all about—so you don’t have to litigate. Litigation has a lot of risk,” Bernstein said, calling this deal “a prudent use of negotiation.”

In his ruling from the bench, Judge Rhodes also urged Detroit’s other creditors to settle up with the city, too.

“Now is the time to negotiate,” Rhodes said, calling for “a spirit of cooperation…[in] all out, good faith mediation.”

Rhodes also noted that in approving this settlement, the city can now pursue what’s called a “cram-down” course in the bankruptcy process.

As part of the settlement, Bank of America and UBS have agreed not to object to Detroit’s blueprint for exiting bankruptcy, formally known as a “plan of adjustment.”

That means Judge Rhodes can approve the plan of adjustment even if all other creditors object—opening the door to speed the bankruptcy process along.

Earlier this week, most of the city’s unsecured bondholders agreed to a settlement worth $287.5 million—meaning they’ll be paid off at almost 75 cents on the dollar.

That leaves Detroit retirees as by far the biggest group of creditors who have yet to reach a settlement with the city. Orr has proposed up to 34% cuts for some retirees, if they don’t settle, or vote to approve the city’s plan of adjustment.

Bernstein said Rhodes issued a clear warning with his remarks from the bench.

“Now’s the time, rather than waiting until later [to settle] when the deal may not be as good,” Bernstein said.