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Bankruptcy judge delays hearing on Detroit swaps deal

'Detroit' is seen on the top of an iron man-hole cover on a street in Detroit, Michigan July 27, 2013. REUTERS/ Rebecca Cook
'Detroit' is seen on the top of an iron man-hole cover on a street in Detroit, Michigan July 27, 2013. REUTERS/ Rebecca Cook

DETROIT (Reuters) - A U.S. Bankruptcy Court judge on Monday granted a motion by Detroit to delay a hearing on a controversial deal between the city and banks aimed at ending interest-rate swap agreements.

In his order, Judge Stephen Rhodes, who is overseeing Detroit's historic municipal bankruptcy case, said the hearing that had been slated to start on Tuesday will be adjourned to a date to be determined.

The ruling came after Detroit earlier Monday requested the court give it additional time to negotiate with bond insurers, retirees, pension funds and some bond holders who objected to the city's deal with swaps counterparties Merrill Lynch Capital Services and UBS AG.

The city aims to end the swaps at a discount and free up casino tax revenue used as collateral for the swap agreements. The city could use casino revenue, which totals as much as $180 million a year, in a so-called debtor-in-possession financing that would enable Detroit to settle with swaps counterparties and investment money in the city.

The proposed $350 million debtor-in-possession financing would give Detroit roughly $250 million it needs to pay the swaps counterparties in order to terminate their agreements. An additional $100 million from the financing would serve as a line of credit for new investment, the city has said.

Douglas Bernstein, a bankruptcy attorney with Plunkett Cooney in the Detroit suburb of Bloomfield Hills, said the delay is a "positive step" in the bankruptcy case.

"That tells me that the mediation has got the parties' attention and they're taking it seriously, and it may have the desired effect by narrowing the areas of contention," Bernstein said. "That's a good thing."

Detroit's motion stated that Syncora Guarantee Inc and Financial Guaranty Insurance Company, which insured the swaps and $1.45 billion of pension debt related to the swaps, as well as the swap counterparties UBS AG and Merrill Lynch Capital Services agreed with the move to stop the hearing.

Syncora, FGIC, other bond insurers, Detroit retirees and pension funds and other creditors filed objections to the deal because they claim it favors the swap counterparties over other creditors. They also argue that the deal would eliminate the $180 million in annual casino revenue as a potential source for paying Detroit's other obligations.

Syncora and FGIC also argued that they insured the pension debt and the swaps on the basis that they were one integrated transaction. Pension debt will remain outstanding for another 22 years even if the swaps, which were used to hedge interest-rate risk, were terminated, leaving the two exposed to potential liability in the future.

This is the second delay for a hearing on the swaps deal, which first was set for a hearing earlier this month. Kevyn Orr, Detroit's state-appointed emergency manager who took the city to bankruptcy court on July 18, has been pushing for a quick process that would end the city's bankruptcy by the fall of 2014.

Rhodes initially set what many thought was an expedited schedule for the case, which would be the biggest municipal bankruptcy in U.S. history.

(Reporting By Joseph Lichterman, additional reporting by Karen Pierog; Editing by David Greising and Ken Wills)

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