Reuters made two big announcements last week concerning Detroit and the largest municipal bankruptcy in U.S. history. First, the state of Michigan has refused to offer any bail-out money to the failing city, despite reports that they will have a budget surplus. State officials warned last Wednesday that they will not use surpluses to save the city.
“A direct bailout for the city by the state is not an option,” said Michigan House Speaker Bolger, a Republican. Bolger did note that city officials, however, are willing to consider other options. But he also noted that it is too early to say what, if any, legislative action would be needed.
According to Reuters, “Detroit filed for bankruptcy in July 2013 and says it has more than $18 billion in debt. Michigan will have an extra $971 million in revenue for its fiscal 2015 budget, according to local media reports.”
Detroit judge rejects deal to end swap agreements
The next development occurred on Thursday of last week as the United States bankruptcy judge ruled that Detroit would not be allowed to complete a deal to end interest-rate swap agreements with two investment banks. If the deal had been approved, the city and UBS AG and Merrill Lynch Capital Services, a division of Bank of America, would have ended the swaps for $165 million, a 43 percent discount.
Because the deal was rejected, experts note there will be more pressure on the banks to allow more concessions and may impact the city’s ability to exit bankruptcy by September. Kevyn Orr, the emergency manager for the city, was considering this step to be critical for Detroit to exit bankruptcy. The judge, however, argued the agreement, was “too high a price to pay.”
What next for the city of Detroit?
With the judge’s ruling, banks may have to go back to the drawing board and continue negotiations. According to Reuters, “UBS and Bank of America declined to comment as did bond insurer Syncora Guarantee, which had opposed the swap agreements Rhodes rejected.”
Even thought the judge rejected the swap agreements, he still believes Detroit and its creditors should continue to negotiate. He believes that a better deal can be reached and negotiations will prove better than litigation to settle the debt claims.
The rejection of the swap, which were used to hedge interest-rate risk for some of the $1.4 billion of pension debt the city sold in 2005 and 2006, does limit the city’s plans for raising cash and may reduce the city’s ability to exit bankruptcy as quickly as hoped.
The judge’s main objection to the swap agreements and those also voiced by the pension funds was that Detroit’s planned payment to UBS and Merrill offered to pay them too much. The pension fund lawyer argued the swap agreements “treated them as secured creditors, paying them close to whole dollars.” The judge also argued this would leave less payment for other creditors who were not part of the deal.
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