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DETROIT, Dec 24 (Reuters) - The city of Detroit reached anagreement on Tuesday with two banks to end a costlyinterest-rate swap agreement, a significant step as the citynegotiates with creditors to put together a plan to exit thelargest municipal bankruptcy in U.S. history.
Detroit will pay $165 million, plus up to $4.2 million incosts, to end the interest-rate swap agreements with UBS AG and Bank of America Corp's Merrill LynchCapital Services at a 43 percent discount. The new agreement,which was reached after the judge overseeing the case imploredthe city to negotiate better terms than it first proposed, willsave the city about $65 million.
As part of the arrangement, Detroit will also take out a$285 million loan from Barclays PLC to pay to end theswaps. It will use $120 million of that toward improvements toservices in the city, which is hampered by $18.5 billion indebt.
Terms of the agreement were announced by Robert Hertzberg,of the law firm Pepper Hamilton, which represents Detroit,before U.S. District Judge Gerald Rosen, the chief mediator inthe bankruptcy case. The deal must still be approved by the U.S.bankruptcy judge overseeing the case, Steven Rhodes.
Robert Gordon, an attorney representing the city's twopension funds, said the funds would continue to oppose the dealeven with the changes. "The revised deal is better, but that isnot saying a lot," Gordon, of the law firm Clark Hill, wrote inan email.
The deal was reached after two days of mediation this week,led by Rosen.
"This is - I think it's the first, I think it's fair to say,significant agreement in the bankruptcy," Rosen said, accordingto a court transcript.
Detroit had initially secured a $350 million loan fromBarclays, of which about $230 million would be used to end theswap agreements with UBS and Merrill Lynch at 75 cents on thedollar. The remainder of the cash was slated to be used toimprove city services.
The swaps had been intended to hedge interest rate risk fora portion of $1.4 billion of pension debt Detroit sold in 2005and 2006.
A spokesman for Bank of America declined to comment. UBScould not be reached immediately for comment.
Rhodes last week encouraged Detroit to negotiate betterterms with the banks after he halted a hearing at which the citywas seeking approval of the deal.
The agreement can be terminated if it is not approved byJan. 31, 2014. Detroit plans to file a request with Rhodes toapprove the deal by Friday, said Hertzberg, the city's attorney.
Detroit Emergency Manager Kevyn Orr, in a statement, calledthe deal an "important development. This agreement represents asignificant reduction from the original deal struck with thebanks," Orr said. "The banks and the City, through mediation,and with the mediator's recommendation, have accepted thereduction in terms."
