Detroit, MI Can’t Pay $165M to UBS & Bank of America For Swaps Deal, Rules Judge

A bankruptcy judge says is refusing to grant the city of Detroit, MI permission to pay $165 million to Bank of America (BA) and UBS AG (UBS) to end an interest-rate swaps deal that taxpayers have been paying $202 million for since 2009. U.S. Bankruptcy Judge Steven Rhodes says the payment, in addition to a fee of over $4 million, is too costly for the beleaguered city.

Rhodes said he doesn’t believe it is in the city’s best interests to make this deal. Detroit filed the biggest municipal bankruptcy in US history due to its $18 billion debt. Prior to seeking bankruptcy protection, the city had arrived at a deal to terminate the swaps contract that it had signed with Bank of America unit Merrill Lynch (MER), UBS, and SBS Financial Products Co. for $230 million.

According to their 2009 deal, the banks are entitled to seek control of Detroit’s casino taxes, which the city pledged as cash to UBS and Bank of America. Now, Detroit may have to submit an emergency motion asking the court to protect the cash so that the banks don’t take the funds.

UBS and Bank of America contend that their swaps claims are protected under the US Bankruptcy Code’s safe harbor provisions, which make it easier for creditors to seize certain collateral when a debtor goes into bankruptcy.

Detroit wanted to buy out the swaps contracts to avoid a lawsuit and free up the casino taxes, which is a huge source of revenue for it. Last month, a deal was reached to terminate the contract for $165 million. The city asked Rhodes to approve a $285 million loan for this, but the court only approved $120 million, which are to go toward city services.

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Detroit’s available cash drying up more slowly than feared: report, Chicago Tribune/Reuters, January 21, 2014

Detroit files for bankruptcy protection, USA Today, July 18, 2013

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