July 2, 2014 at 4:52 pm

Detroit bankruptcy lawyers probe award for Kilpatrick pension deal

Detroit — The city’s bankruptcy team wants to know how and why a prominent financial trade publication gave the city an award in 2005 for an infamous pension deal backed by Kwame Kilpatrick and later blamed for helping plunge Detroit into bankruptcy.

The city’s lawyers signaled in a court filing Wednesday that it will subpoena The Bond Buyer for documents concerning award nominations related to the deal. The publication gave the pension transaction its Midwest Regional Deal of the Year Award in December 2005.

The forthcoming subpoena indicates the award and the pension deal will factor into an August trial over whether Detroit can restructure $18 billion in debt and emerge from the biggest municipal bankruptcy case in U.S. history.

Bond Buyer Editor in Chief Michael Scarchilli declined comment Wednesday.

The subpoena is seeking documents relating to the pension deal and nominations for the National Deal of the Year and the Midwest honor, according to a copy filed in bankruptcy court.

In 2005, Detroit borrowed $1.44 billion from investors through a financial note called “certificates of participation,” or COPs. The deal was designed to pour money into the city’s two pension funds.

The pension debt was made more complex by an interest rate swaps deal layered on top of $800 million of the debt. The city traded a variable interest rate for a fixed rate.

The swaps initially gave Detroit lower borrowing costs.

But when prevailing interest rates plummeted in 2008-09, Detroit’s annual payment ballooned from an estimated $5 million a year to $50 million.

The city, meanwhile, has subpoenaed one of the deal’s architects, Kilpatrick's finance chief, Sean Werdlow.

Werdlow resigned soon after the deal closed and joined a bank that profited from the deal.

The firm, SBS Financial Products Co., was created by an investment bank headed by Suzanne Shank, who recently bought a 6,000-square-foot, multimillion-dollar home with Werdlow.

The subpoena issued by the city, among other things, seeks “communications with Kwame Kilpatrick, or members of his administration, concerning the COPs transaction.”