In 2005 the City borrowed $1.4 billion to shore up its pension fund, and because the bonds were subject to variable interest rates, decided to enter into the aforementioned contracts as a hedge against the possibility of interest rates rising. Of course, interest rates ended up plummeting and the swap contracts ended up being a losing bet. Furthermore, the City apparently lost a substantial portion of the borrowed funds when the market crashed in 2008, making the bonds “junk bonds,” which constituted a violation of the terms of the swap agreements. At that point, the City gave UBS and BA a lien on its casino tax revenue to secure payment on the contracts.
After rejecting the first two (much higher) settlement offers, the judge approved a settlement in the amount of $85 million to be paid in installments by the City. The judge expressed the hope that other creditors would follow suit and engage with the City in the “spirit of negotiation and compromise.”
The author of this article then noted that in the context of a municipal bankruptcy, if one impaired class of voters approves a city’s adjustment plan, the judge may have the ability to impose the terms on other creditor classes. Nothing more was said on this point, which struck me as potentially very important to the resolution of this case (i.e., what level of creditor approval is required to confirm a city’s adjustment plan in chapter 9?).
See Detroit Wins Judge’s Nod for Contract Settlement, http://dealbook.nytimes.com/2014/04/11/judge-approves-pact-to-end-detroit-swap-deal/?_php=true&_type=blogs&_r=0
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