Detroit officials spent Friday reshuffling legal and financial plans, a day after a federal bankruptcy judge barred the city from paying $165 million to end some troublesome interest-rate swaps that have been tying up money the city needs.
“We really can’t do the plan of adjustment until we get some clarity on the swaps,†said Bill Nowling, a spokesman for the city’s emergency manager, Kevyn Orr. He was referring to Detroit’s plan for shedding debts to emerge from bankruptcy. The plan must be approved by the bankruptcy court, and Detroit had hoped to have filed it by now. “The swaps are a big chunk of the debt that we have to work with,†Mr. Nowling said.
The ruling on Thursday by Judge Steven Rhodes left Detroit’s emergency management team unsure whether the city could still go ahead with a special loan they had arranged from Barclays, which was also affected by the ruling. Mr. Nowling said the team was waiting to hear from Barclays but did not expect to know whether the loan was still available, or on what terms, until early next week.
Detroit had previously arranged to borrow $285 million from Barclays, with $165 million of the money going to terminate the interest-rate swap contracts with two banks, Bank of America and UBS. Now that Judge Rhodes has rejected that plan, Detroit needs only a smaller loan, for $120 million. It had intended to use that portion of the $285 million to improve city services.
Judge Rhodes did rule on Thursday that Detroit could borrow the $120 million, although he added conditions. Mr. Nowling, said it was not yet clear whether Barclays would lend just the smaller amount. He said that if the loan from Barclays fell through, Detroit would resume talks with four other prospective lenders that provided commitment letters during the vetting process that led to the selection of Barclays. Those lenders have not been identified.
The swaps continue to be a significant sticking point. To secure them, as its credit rating sank in 2009, Detroit pledged a stream of revenue that it receives from a tax on casinos. Until Thursday, the plan was for Detroit to free up the casino money by canceling the swaps contracts and then pledging it as collateral for the new loan. But now the casino taxes are still tied up with the swaps. It was not clear on Friday whether, in the absence of the casino money, Detroit had enough cash from other sources, like income taxes, to secure a loan of $120 million.
Mr. Nowling said Detroit had already begun talks with Bank of America and UBS on Friday to determine whether they could reach a settlement that would Judge Rhodes would accept. The judge must find that any termination agreement is fair and equitable to other creditors, and he said on Thursday that $165 million was far too high. Other creditors have been arguing that the pledge of casino taxes is invalid and that the swaps should be treated as unsecured credit.
Mr. Orr testified recently that it was the city’s chief bankruptcy mediator who came up with a proposed payment of $165 million and that the mediator had threatened to hold the banks in contempt of court if they refused to accept that figure. Mr. Orr testified that he proposed a counter offer of $150 million but the mediator told him not to bother because the banks would not go lower.
