Brandy Baker / The Detroit News)
Detroit — The city reached a new settlement with two banks to end a troubled pension debt deal Friday and will try to seek approval from a bankruptcy judge who rejected two earlier settlements.
The proposed settlement, which will be filed in bankruptcy court in coming days, could free up more money to pay creditors and bankroll restructuring efforts amid the city’s landmark bankruptcy case.
The deal, revealed Wednesday during a hearing in bankruptcy court, comes more than one month after U.S. Bankruptcy Judge Steven Rhodes said he would not let Detroit continue to make bad financial decisions. He rejected a proposed $165 million settlement with two banks to terminate the pension debt deal.
During an unrelated bankruptcy hearing Wednesday, Detroit attorney Robert Hertzberg told Rhodes the city has “a new swaps agreement” that would be disclosed in its plan of adjustment.
Rhodes called an earlier deal too generous and urged negotiators, who had reached a Christmas Eve settlement between Detroit and banks UBS AG and Bank of America’s Merrill Lynch Capital Services, to resume negotiations.
The settlement is a bid to end a deal engineered during ex-Mayor Kwame Kilpatrick’s tenure and blamed for pushing the city into bankruptcy.
Several groups, including bond insurers, pension funds and banks, fought the $165 million settlement and attempts to terminate the Kilpatrick-era debt deal, calling it illegal and too generous.
The proposed settlement is the latest strategy the city’s legal team has deployed to end the troubled pension debt deal and free up $15 million in monthly casino tax revenue that the banks hold a lien over until they’re paid each month.
Rhodes twice rejected the city’s earlier settlements, winning praise from critics of a complex financial scheme designed to prop up the city’s pension funds.
“Thank goodness this bankruptcy judge was smart enough to put a stop to it,” said Michael Greenberger, an expert on derivatives at the University of Maryland’s law school.
If the city is successful in settling the swaps claim and getting Rhodes to invalidate the $1.44 billion pension debt deal, Greenberg said, “there will be more money for the pension beneficiaries.”
“If invalidating the IOUs essentially invalidates the swaps, that’s good for the people of Detroit,” Greenberger said of the underlining pension debt, known as certificates of participation. “That whole thing was a sham.”