Brandy Baker / The Detroit News)
Detroit — A judge will rule Thursday whether Detroit can pay two banks $165 million to terminate a troubled pension debt deal blamed for pushing the city into bankruptcy.
U.S. Bankruptcy Judge Steven Rhodes said he would announce his decision at 2 p.m. Thursday following a days-long trial that started last month and featured objections from bond insurers, pension funds, banks and others.
At stake is a proposal to pay UBS AG and Bank of America $165 million to end an interest rate swaps arrangement tied to $1.44 billion in money borrowed in 2005-06 to prop up Detroit’s pension funds. If approved, Detroit will pay off the banks from a $285 million loan and spend the remaining $120 million improving city services and public safety.
Rhodes listened to several hours of closing arguments Monday from the city and objectors.
The $165 million agreement is extremely beneficial to Detroit and the lowest amount Bank of America’s Merrill Lynch Capital Services was willing to accept, a lawyer said.
“There is no question the settlement is extremely beneficial to the city,” Merrill Lynch lawyer Mark Ellenberg told Rhodes. “The city pushed us to the lowest number we would ever accept.”
Emergency Manager Kevyn Orr is delaying the filing of his debt-cutting plan of adjustment until Rhodes approves or rejects the deal.
Rhodes abruptly halted a trial last month over Orr’s original plan to pay the two banks $230 million after questioning whether the settlement of 75 cents on the dollar was unfair to other creditors who face the prospect of a much smaller recovery.
UBS and Bank of America agreed to a lower payout during Christmas Eve negotiations with the city and insurers of the swaps and underlining pension debt.
City bankruptcy lawyer Corinne Ball said the settlement would eliminate Detroit’s most costly obligation and lead to a “cost-effective” loan.
She reminded the judge that Chapter 9 bankruptcy is set up to restore a municipality’s viability.
“And restore services at a level it deems necessary – meaning the city, not its creditors,” Ball told the judge.
There is no guarantee Detroit will spend some of the loan improving city services, said Jennifer Green, a lawyer for the city’s pension funds. There is evidence the city, instead, will use the cash for working capital, she said.
The city’s attempts to borrow money are misguided, said Ryan Bennett, a lawyer for bond insurer Syncora.
“The debtor’s focus here and now should be on building consensus around a confirmable Chapter 9 plan,” Bennett said. “Substantial borrowing and spending may be necessary for the city’s ultimate revitalization but this case is first and foremost a debt-adjustment process.”
Bennett does not believe Detroit will be rehabilitated or improved after borrowing the money.
“It looks like the money is going out the door …,” Bennett told the judge.