Detroit, seeking to reduce its debt in bankruptcy, said objections to its proposal to pay $85 million to cancel interest-rate swaps that cost taxpayers more than $200 million aren’t valid.
“The objectors insist that because the settlement is not, in their view, the best of all possible worlds, this court must substitute its business judgment for the city’s and require the city to litigate rather than compromise,” Detroit said in a U.S. Bankruptcy Court filing today. “The objectors’ Panglossian view ignores the very real risks and costs of litigation.”
The swaps agreement, if approved, would remove one obstacle in the city’s record $18 billion municipal bankruptcy.
Since filing for bankruptcy in July, Detroit has battled municipal unions, retired city workers, bondholders and insurers over cuts. The insurers have sued the city for deciding to treat general obligation bonds as unsecured debt, have opposed the swaps deal and are fighting Detroit’s attempt to cancel the $1.44 billion pension-obligation bonds that underlie the swaps.
The swap agreements with UBS AG (UBSN) and Bank of America Corp. (BAC:US)’s Merrill Lynch unit were designed to protect against rising interest rates by requiring the banks to pay the city if rates climbed above a certain level. When rates fell, Detroit had to make monthly payments that have cost taxpayers $200 million since 2009.
In January, U.S. Bankruptcy Judge Steven Rhodes rejected as too costly a proposal to pay $165 million to end the swaps. That was a reduction from a deal reached days before the city’s July bankruptcy filing to pay $230 million. A hearing on the current proposal is set for April 4.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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