The proposed settlement between Detroit’s emergency manager Kevyn Orr and the city’s swaps counterparties, UBS and Merrill Lynch, is on the docket this week in federal bankruptcy court where the case is being heard. The Bond Buyer reported:
— Caitlin Devitt (@Devitt_BB) September 23, 2013
Mediation could be a good alternative for the parties because this is a complex element of Detroit’s bankruptcy. Circling around the perimeter of this bankruptcy litigation and mediation is the bond insurer Syncora, which insured both the underlying pension obligation bonds and the interest rate swaps that are part of the negotiations between Orr, UBS and Merrill Lynch. Orr has worked to force Syncora, the bond insurer, out of the picture and essentially leave it responsible to pay off the pension obligation bonds without access to Detroit’s casino tax revenues. Syncora believes that it is legally entitled to access the casino revenues because it insured the pension obligation bonds, which have a cross-default covenant with the swaps.
The Detroit News does an excellent job of threading the story together:
[Orr’s] proposal to pay UBS AG and Bank of America [Merrill Lynch] at least $250 million to terminate an interest rate swap arrangement that went bad for the city during the recession is opposed by insurers of the debt who stand to lose millions of dollars and retirees owed billions of dollars in promised retirement benefits.
Some legal and financial experts also question why Orr is trying to settle with the two big banks so quickly in the bankruptcy process.