Bankruptcy judge OKs Detroit deal to settle debt with 2 banks

4/11/2014

DETROIT  — Detroit can move ahead with a plan to settle a ruinous multimillion-dollar debt with two banks for $85 million, a judge said today as he also urged the bankrupt city and other creditors to reach more deals.

Bankruptcy Judge Steven Rhodes signed off on the agreement to pay UBS and Bank of America.

The settlement is just a small portion of the city’s $18 billion in liabilities, which include $12 billion not secured by taxes or other revenue.

Each bank will get $42.5 million spread out over a number of years — a “reasonable” amount, Rhodes said.

He said the plan reduces the amount of principal owed to the banks and extends the time to pay what’s left. The agreement also doesn’t require a new loan, he said.

Rhodes had denied earlier proposals for $220 million and $165 million as too generous.

Detroit had pledged casino tax revenue in 2009 as collateral to avoid defaulting on pension debt payments. It allowed the city to get fixed interest rates on pension bonds with the banks, but the arrangement became too costly when interest rates plunged.

The city had owed $288 million on the so-called swaps deal, made in 2005 and 2006.

The settlement is important in emergency manager Kevyn Orr’s plan to restructure Detroit’s debt and get the city out of bankruptcy by mid-October. It gives Orr momentum and could eventually persuade the judge to order a “cram-down” on other creditors, especially retirees, if they don’t make their own deals.

“Now is the time to negotiate,” Rhodes said. “Litigation should be a last resort.”

Under a cram-down, Rhodes can approve a bankruptcy exit plan if, among other things, it’s been accepted by certain creditors and is considered fair and equitable to other creditors who are opposed.

Earlier in the week, in a separate deal, banks agreed to accept 74 cents for each dollar of $388 million in bond debt.

Detroit continues to hold mediation sessions with retirees, representatives of the city’s two public pension systems and others.