RESTRUCTURING & BANKRUPTCY
Abayomi Azikiwe, PANW Editor, Quoted in New York Times: 'Detroit Dictator Wins Judge’s Nod for Swap Settlement'
By MARY WILLIAMS WALSH APRIL 11, 2014, 10:50 AM
New York Times
Detroit, which is in bankruptcy, is under emergency management that is scheduled to expire in September.
Updated, 7:38 p.m. | A federal judge on Friday approved this bankrupt city’s latest attempt to extricate itself from some long-term financial contracts that have been costing it tens of millions of dollars a year, holding up its settlement as an example of “the very spirit of negotiation and compromise” that he hoped other creditors would follow.
Judge Steven W. Rhodes of United States Bankruptcy Court for the Eastern District of Michigan ruled that Detroit could proceed with a plan to pay $85 million to UBS and Bank of America over several months to terminate the financial contracts, known as interest-rate swaps. The city entered into the swaps in 2005 as part of a transaction that was supposed to help finance pensions.
Under the terms of the new settlement, the two banks agreed to back Detroit’s overall plan of adjustment, which is critical for the city’s push to resolve its bankruptcy by early fall. Municipal bankruptcy rules say that if one class of impaired creditors votes to approve the city’s plan of debt adjustment, the judge may be able to impose the terms forcibly on everybody else.
The state law that put Detroit under emergency management is scheduled to expire in September. There are concerns that the case will end up in a hopeless quagmire if creditors continue to fight settlement proposals and the bankruptcy remains unresolved by the time the emergency manager, Kevyn D. Orr, ends his term.
The judge’s decision on Friday gives Detroit leverage to seek negotiated settlements with other creditors, although stiff opposition still remains.
It was the third time Detroit had asked Judge Rhodes to approve a deal to end the swap contracts. Last December, the city proposed paying $230 million, with borrowed money; Judge Rhodes told it to keep negotiating. In January, Judge Rhodes was more explicit when he rejected Detroit’s second proposal, to pay the banks $165 million, saying it was “just too much money.” He noted at that point that Detroit would have a reasonable chance of success if it sued the banks outright, calling the swaps invalid and refusing to make any payments at all. But he urged the city and the two big banks to try to renegotiate a settlement.
“They might have been discouraged and hardened their positions,” Judge Rhodes said. “They chose instead to re-engage.”
“The message,” he added, “is that now is the time to negotiate.”
Before the ruling on Friday, Detroit’s various creditors, including unions and financial institutions, had filed objections to the proposed settlement. They argued, among other things, that some liens on casino tax revenue that Detroit had given to the two banks as collateral for the swaps were invalid under state law. Michigan’s gambling statute cites the lawful uses of casino tax money, and backstopping financial hedges is not among them.
In explaining his thinking on this issue, Judge Rhodes said that even if the creditors were able to win a ruling that the liens were invalid under state law, they would still run into a big obstacle in the federal law. The United States Bankruptcy Code contains a “safe harbor” for financial derivatives that says, in effect, that swaps and other such financial contracts remain fully enforceable, even in bankruptcy. Consequently, Judge Rhodes said, possible litigation by Detroit’s creditors in that area “offers little reward.”
Furthermore, he said that Detroit’s new settlement would allow the city to retrieve some much-needed casino tax revenue from a lockbox, where it is now being held as collateral for the swaps. As the money becomes available, Detroit will be able to use it to promote a recovery.
“It is estimated in the hundreds of millions of dollars,” the judge said, adding that the city will have more predictable cash flows and less need to borrow. “The court finds that these benefits are real and substantial,” he said.
Some who attended the hearing were disappointed that the judge was no longer talking about suing the two banks.
“There’s a lot of pressure on the judge to wrap up this bankruptcy quickly,” said Abayomi Azikiwe of the Moratorium Now Coalition, saying he thought that helped explain why Judge Rhodes had approved the settlement.
“The city has already paid Bank of America and UBS $300 million,” Mr. Azikiwe said, referring to the payments Detroit has been making under the swaps, which were designed as a hedge against rising interest rates. The hedge has turned against Detroit because interest rates have fallen instead.
“I think it’s outrageous that these two banks can take another $85 million away from the taxpayers of this city,” he said.
Detroit entered into the swap contracts in 2005, when it tapped the municipal bond market for $1.4 billion to put into its workers’ pension funds. Much of the deal was structured with variable-rate debt, which is why the hedge was added.
But now many residents see that transaction as a disaster in the making. Soon after the $1.4 billion was added to the municipal pension system, the crash of 2008 decimated the fund. Now the pension system is even further short than it was in 2005, when the city first tried to shore it up with the borrowed money.
The 2005 borrowing also used an unusual structure in an effort to avoid violating the city’s legal debt limit. In 2009, the debt was downgraded to junk, putting the city out of compliance with the terms of the swaps. So Detroit restructured the swap obligations, offering the two banks the tax revenue that it received from local casinos as a backstop.
Soon after Judge Rhodes mentioned that the city might have a good case if it sued to nullify the 2005 borrowing, the emergency manager brought just such a suit even as Detroit continued to negotiate with the two banks, which were also top underwriters of the borrowing.
That lawsuit, in turn, prompted another creditor of the city, the Financial Guaranty Insurance Company, to countersue, arguing that if the 2005 transaction was invalid, the city’s pension system ought to disgorge the $1.4 billion and return it to investors. It was not clear what effect Judge Rhodes’s ruling might have on that litigation.
Abayomi Azikiwe, PANW Editor, Quoted in New York Times: 'Detroit Dictator Wins Judge’s Nod for Swap Settlement'
 |
| Ezza Brandon and Abayomi Azikiwe outside federal court in Detroit. |
New York Times
Detroit, which is in bankruptcy, is under emergency management that is scheduled to expire in September.
Updated, 7:38 p.m. | A federal judge on Friday approved this bankrupt city’s latest attempt to extricate itself from some long-term financial contracts that have been costing it tens of millions of dollars a year, holding up its settlement as an example of “the very spirit of negotiation and compromise” that he hoped other creditors would follow.
Judge Steven W. Rhodes of United States Bankruptcy Court for the Eastern District of Michigan ruled that Detroit could proceed with a plan to pay $85 million to UBS and Bank of America over several months to terminate the financial contracts, known as interest-rate swaps. The city entered into the swaps in 2005 as part of a transaction that was supposed to help finance pensions.
Under the terms of the new settlement, the two banks agreed to back Detroit’s overall plan of adjustment, which is critical for the city’s push to resolve its bankruptcy by early fall. Municipal bankruptcy rules say that if one class of impaired creditors votes to approve the city’s plan of debt adjustment, the judge may be able to impose the terms forcibly on everybody else.
The state law that put Detroit under emergency management is scheduled to expire in September. There are concerns that the case will end up in a hopeless quagmire if creditors continue to fight settlement proposals and the bankruptcy remains unresolved by the time the emergency manager, Kevyn D. Orr, ends his term.
The judge’s decision on Friday gives Detroit leverage to seek negotiated settlements with other creditors, although stiff opposition still remains.
It was the third time Detroit had asked Judge Rhodes to approve a deal to end the swap contracts. Last December, the city proposed paying $230 million, with borrowed money; Judge Rhodes told it to keep negotiating. In January, Judge Rhodes was more explicit when he rejected Detroit’s second proposal, to pay the banks $165 million, saying it was “just too much money.” He noted at that point that Detroit would have a reasonable chance of success if it sued the banks outright, calling the swaps invalid and refusing to make any payments at all. But he urged the city and the two big banks to try to renegotiate a settlement.
“They might have been discouraged and hardened their positions,” Judge Rhodes said. “They chose instead to re-engage.”
“The message,” he added, “is that now is the time to negotiate.”
Before the ruling on Friday, Detroit’s various creditors, including unions and financial institutions, had filed objections to the proposed settlement. They argued, among other things, that some liens on casino tax revenue that Detroit had given to the two banks as collateral for the swaps were invalid under state law. Michigan’s gambling statute cites the lawful uses of casino tax money, and backstopping financial hedges is not among them.
In explaining his thinking on this issue, Judge Rhodes said that even if the creditors were able to win a ruling that the liens were invalid under state law, they would still run into a big obstacle in the federal law. The United States Bankruptcy Code contains a “safe harbor” for financial derivatives that says, in effect, that swaps and other such financial contracts remain fully enforceable, even in bankruptcy. Consequently, Judge Rhodes said, possible litigation by Detroit’s creditors in that area “offers little reward.”
Furthermore, he said that Detroit’s new settlement would allow the city to retrieve some much-needed casino tax revenue from a lockbox, where it is now being held as collateral for the swaps. As the money becomes available, Detroit will be able to use it to promote a recovery.
“It is estimated in the hundreds of millions of dollars,” the judge said, adding that the city will have more predictable cash flows and less need to borrow. “The court finds that these benefits are real and substantial,” he said.
Some who attended the hearing were disappointed that the judge was no longer talking about suing the two banks.
“There’s a lot of pressure on the judge to wrap up this bankruptcy quickly,” said Abayomi Azikiwe of the Moratorium Now Coalition, saying he thought that helped explain why Judge Rhodes had approved the settlement.
“The city has already paid Bank of America and UBS $300 million,” Mr. Azikiwe said, referring to the payments Detroit has been making under the swaps, which were designed as a hedge against rising interest rates. The hedge has turned against Detroit because interest rates have fallen instead.
“I think it’s outrageous that these two banks can take another $85 million away from the taxpayers of this city,” he said.
Detroit entered into the swap contracts in 2005, when it tapped the municipal bond market for $1.4 billion to put into its workers’ pension funds. Much of the deal was structured with variable-rate debt, which is why the hedge was added.
But now many residents see that transaction as a disaster in the making. Soon after the $1.4 billion was added to the municipal pension system, the crash of 2008 decimated the fund. Now the pension system is even further short than it was in 2005, when the city first tried to shore it up with the borrowed money.
The 2005 borrowing also used an unusual structure in an effort to avoid violating the city’s legal debt limit. In 2009, the debt was downgraded to junk, putting the city out of compliance with the terms of the swaps. So Detroit restructured the swap obligations, offering the two banks the tax revenue that it received from local casinos as a backstop.
Soon after Judge Rhodes mentioned that the city might have a good case if it sued to nullify the 2005 borrowing, the emergency manager brought just such a suit even as Detroit continued to negotiate with the two banks, which were also top underwriters of the borrowing.
That lawsuit, in turn, prompted another creditor of the city, the Financial Guaranty Insurance Company, to countersue, arguing that if the 2005 transaction was invalid, the city’s pension system ought to disgorge the $1.4 billion and return it to investors. It was not clear what effect Judge Rhodes’s ruling might have on that litigation.
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