Detroit's bankruptcy case takes a dramatic turn.
“I would encourage that as strongly as I can,” Judge Steven Rhodes said of Thursday negotiations with two banking giants.
Judge Steven Rhodes this afternoon suspended a trial over whether to OK a deal with two major creditors, the Free Press reports. He "urged the city of Detroit to renegotiate a proposed debt settlement with two global banks," reporter Nathan Bomey writes.
The decision had the dual effect of dealing a setback to a settlement that Detroit’s bankruptcy attorneys described as crucial to the city’s recovery — while simultaneously giving the city ammunition to convince Bank of America Merrill Lynch and UBS to offer a better deal. . . .
[The result is] the indefinite suspension of a three-day trial in which Rhodes was being asked to approve the [vcredit] swaps settlement and $350 million in fresh bankruptcy financing from London-based Barclays.
The city has argued that it must pursue the swaps settlement and bankruptcy financing to free up cash flow and reinvest in city services. The swaps cost the city about $50 million a year, diverting about 5% of the city’s revenue to an expense that has nothing to do with city services.
Attorneys hired by Emergency Manager Kevyn Orr said they'd spend Thursday renegotiating the deal and return to court Friday with a status update -- a step Rhodes encouraged "as strongly as I can.”
Bomey reported Sept. 25 that the costly swaps deal, brokered in 2005 when Kwame Kilpatrick was mayor, might have been illegal.
"This is one of the most complex and important elements in the city’s bankruptcy proceedings," he wrote then. Here's how Bomey explained the situation three months ago:
The deal involved two layers of speculative financial instruments. One layer involved “pension obligation certificates of participation” — essentially IOUs that allowed Detroit to borrow money to give to its two pension funds.
The second layer involved interest rate swaps, a high-risk bet that Detroit lost. The certificates of participation carried a variable interest rate. So the city bought the swaps as a hedge against the risk that interest rates would rise. In fact, interest rates fell sharply during the 2008-09 financial crisis. . . .
Orr has offered to pay UBS and Bank of America at least 75 cents on the dollar, while other creditors may receive as little as 10 cents on the dollar and city retirees’ pensions could be cut.
Complicating matters is that Orr acknowledges the banks might not deserve special treatment legally, yet he still plans to pay them off instead of pursuing a potentially costly legal battle to challenge their rights.
