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By Joseph Lichterman
DETROIT, Jan 13 (Reuters) - U.S. Bankruptcy Judge StevenRhodes said he will rule Thursday on whether to let stand a dealstruck between the city of Detroit and two investment banks toend toxic interest rate swap agreements that proved to be astrain on city finances.
Lawyers for bond insurers, banks, pension funds and othersobjected to the deal during a bankruptcy court hearing Monday,saying that the Dec. 24 deal with UBS AG and MerrillLynch Capital Services, a unit of Bank of America Corp,was not in the best interest of the city. Detroit could have wonlarger concessions from the investment banks, the opponentsargued.
Rhodes said he would announce his decision in a hearing onThursday at 2 p.m. (1900 GMT). The hearing was postponed twicelast week due to inclement weather.
If Rhodes approves the agreements, Detroit will pay thebanks $165 million plus fees to end the agreements at a 43percent discount to their original cost to the city. Detroitentered into the interest-rate swaps in a failed attempt tohedge, or limit the risk, on some of the $1.4 billion in pensiondebt that it sold in 2005 and 2006.
Caroline English, the attorney representing bond insurerAmbac Assurance Corp, argued the city had strong legalarguments to support a full termination of the swaps agreementand should not have settled with the banks.
"This deal should have the swap counterparties paying thecity, not the city paying the swap counterparties," Englishsaid.
Detroit's emergency manager, Kevyn Orr, testified previouslythat the city settled with the banks because it had only a 50-50chance of succeeding in litigation and it did not want to risk alengthy and expensive legal process.
In response to the closing arguments, Corinne Ball, theattorney representing the city, said Detroit could lose accessto casino tax revenue, which served as collateral in the swapscontract.
"That possibility and those consequences are things theemergency manager had to consider," Ball said, arguing that cityresidents should not have to wait for the city to be able tofinance improvements to services.
The objectors argued that the use of casino revenue as alien violated Michigan law because the funds were not used todirectly provide services to Detroit residents.
Detroit gets casino tax revenue of about $180 million ayear.
Detroit and the banks initially agreed to terminate theswaps for $230 million, or 75 cents on the dollar, but Rhodesencouraged the city to renegotiate the deal to secure betterterms. The city reached its agreement with UBS and Merrill aftertwo days of mediation on Dec. 23 and 24.
Detroit also has reached an agreement with Barclays Plc for a $285 million loan to end the swaps. Detroit plansto use about $120 million of the loan to fund improvements tocity services.
But Vincent Marriott, who represents Detroit creditorsHypothekenbank Frankfurt AG, Hypothekenbank FrankfurtInternational SA and Erste Europäische Pfandbrief-undKommunalkreditbank Aktiengesellschaft in Luxembourg SA, arguedthat the court should not approve the post-petition financing.
He said the city should have provided the Detroit CityCouncil with more information about the loan and also pursued anunsecured loan.
"By beginning the solicitation process by offeringcollateral, the city ensured substantial collateral would begranted to the lender," Marriott said.
The lawyer representing Merrill Lynch, Marc Ellenberg,argued that the deal was in the best interest of both the cityand the banks.
"There is such a thing as a win-win transaction," he said inresponse to a question from Rhodes about Merrill's motivationfor reaching its agreement with the city.
"There is such a thing as the lesser evil and that's whatwe've tried to reach," Ellenberg said.
Detroit was declared legally bankrupt on Dec. 3, making itthe largest U.S. city ever to go bankrupt. The city has morethan $18 billion in debt and other obligations.
Orr had said he planned to file the city's plan to deal withits debt to the court in the first week of January, but that hasbeen delayed until the issues surrounding the swaps are dealtwith, spokesman Bill Nowling said in an email last week.
"If it looks like mediation efforts are bearing fruit, itcould push back the release date as we look to include anymediated agreements in the plan," Nowling said.
