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DETROIT, Dec 17 (Reuters) - Detroit's path throughbankruptcy began to take shape on Tuesday, with a second bondinsurance firm ready to drop its objections to a controversialcity financing plan, joining another bond insurer, bondholdersand a committee of retired city workers in reaching agreementswith the city.
But other objectors remain, including bond insurers SyncoraGuarantee Inc. and Financial Guaranty Insurance Co, which arecontinuing an effort to derail an expensive interest-rate swapsdeal at a discount.
The two companies insured the swaps and $1.45 billion ofpension debt associated with the swaps. Detroit needs the swapsdeal in order to obtain a $350 million loan, some of which wouldbe used to improve city services.
A few holders of $375 million of Detroit's pension debt alsosaid Tuesday they were dropping their objection to the swapsdeal after reaching an agreement with the city that would notprevent them from pursuing future claims.
The various agreements are emerging against the backdrop ofa scheduled three-day hearing in bankruptcy court. At thehearing, Detroit began defending a key complex transaction inwhich the city would terminate a crippling interest-rate swapdeal while securing a $350 million loan, known asdebtor-in-possession financing.
Bond insurers have argued that the swaps deal gives anadvantage to the city's counterparties in the swaps contracts,at the expense of other creditors.
U.S. Bankruptcy Judge Steven Rhodes questioned on Tuesdaywhether Detroit acted properly in agreeing to pay 75 percent ofwhat it owed to UBS AG and Bank of America Corp'sMerrill Lynch Capital Services, the counterparties inthe swaps.
"I want to understand as best you can help me to understandit what the considerations were that led to the agreement to buyout the swaps at 75 percent as opposed to some otherpercentage," Rhodes said.
Detroit attorney Corinne Ball said the deals were the"bestfeasible financing realistically available to the city in itscurrent condition."
In her opening statement, Ball informed Judge Rhodes thatbond insurer National Public Finance Guarantee Corporation wasplanning to withdraw its objections to the swaps deal.
National, the public finance subsidiary of MBIA Inc,would be the second bond insurer to withdraw objections,following Assured Guaranty Municipal Corp, which onMonday dropped its objection to the swaps deal and DIPfinancing. A spokesman for National confirmed that the company'sobjections would be dropped.
Assured dropped its objection after Detroit in a courtfiling on Monday agreed not to use revenue that is pledged topay off water and sewer bonds as collateral in the financing ofits DIP loan.
The city's filing further stated that if the bankruptcy judgefinds that the city's unlimited-tax GO bonds are secured debt,property tax revenue earmarked for those bonds would be largelyoff limits for the DIP financing. The revenue would be used onlyif all other claims against the GO bonds are "satisfied infull."
Assured, National and a third bond insurer, Ambac AssuranceCorp, have sued the city over its Oct. 1 default on thegeneral obligation bonds. The city in a filing has asked JudgeRhodes to dismiss the lawsuits.
Assured guarantees payment on about $2.1 billion of Detroitdebt made up mostly of water and sewer bonds, along with $146million of unlimited-tax general obligation bonds. National alsoinsures payment on city water, sewer and GO bonds.
The court proceeding that began Tuesday is a key step asDetroit's emergency manager, Kevyn Orr, seeks to assemble afinancial restructuring plan for Detroit that he has said hehopes to deliver to the court by early January. Withouttermination of the swaps deal, Orr cannot secure the $350million loan that would be essential to his plan.
About $230 million of Detroit's loan, provided by BarclaysPLC, would be used to terminate the swaps deal. Theremainder would be used to finance quality-of-life improvementsthroughout the city.
Gaurav Malhotra, a financial analyst who has advised thecity since 2011, testified on Tuesday that without the swapstermination and DIP financing, the city would likely run out ofcash by the end of this year.
The swaps termination and DIP financing plan have drawnobjections mostly from bond insurers, Detroit pension funds, andGerman banks that were opposed to the city's proposed use ofcasino tax and other revenue to pay off the DIP financing,leaving less money to pay other creditors. Syncora and FGIC alsoobjected to Detroit's plan on the basis that the elimination ofthe swaps could expose them to potential liability on theoutstanding pension debt they insure.
The committee representing Detroit's retirees last monthwithdrew its objection to the interest-rate swap deal.
