By Joseph Lichterman
DETROIT, Dec 30 (Reuters) - The mediators who oversawnegotiations between Detroit and two banks to strike a deal toend a costly interest-rate swap agreement recommended on Mondaythat the judge in charge of Detroit's bankruptcy approve theagreement, arguing the deal is a critical first step towardresolving the historic case.
The city struck a deal with UBS AG and Bank ofAmerica Corp's Merrill Lynch Capital Services on Dec. 24to end the interest-rate swap agreements at a 43 percentdiscount. The negotiations happened after U.S. Bankruptcy JudgeSteven Rhodes, who is overseeing the case, encouraged Detroit tonegotiate better terms for the deal.
Rhodes still must approve the agreement and he will hold ahearing on Jan. 3 to consider the arrangement.
In a document filed with the bankruptcy court on Monday,U.S. District Judge Gerald Rosen and U.S. Bankruptcy JudgeElizabeth Perris, two of the mediators in the case, recommendedthat Rhodes sign off on the deal because it is in the interestof both the banks and the city.
"As is the case in almost all settlements in bankruptcy (orindeed, in most litigation), this settlement, and the Mediators'recommendation of it, can best be captured and characterized bythe admonition, 'Do not allow the perfect to become the enemy ofthe good,'" they wrote.
"Although it is not a perfect settlement, the mediatorsbelieve ... it represents a fair and equitable solution that isadvantageous to all concerned."
Detroit will pay $165 million, plus up to $4.2 million incosts, to end the interest-rate swap agreements that weresupposed to hedge interest rate risk for some of the $1.4billion in pension debt that the city sold in 2005 and 2006.
Initially, the city landed a $350 million loan from BarclaysPlc and planned to use about $230 million to end theswaps with Merrill and UBS at a 25 percent discount.
Detroit will now take out a $285 million loan from Barclaysto end the swaps. About $120 million of the loan will be used toimprove city services.
Despite the mediators' recommendation, the deal still facesopposition from some city creditors, including Detroit's twopension funds. In an email last week, attorney Robert Gordon,who represents the funds, said they will continue to oppose thedeal because "the revised deal is better, but that is not sayinga lot."
Detroit, which is weighed down by $18.5 billion in debt, filed the largest municipal bankruptcy in U.S. history in July.Earlier this month Rhodes declared the city eligible forbankruptcy and Detroit Emergency Manager Kevyn Orr has said heplans to submit an initial plan to restructure Detroit's debt tothe bankruptcy court in early January.
The two mediators characterized the swaps deal as a"significant first step" in resolving the city's case.
Barclays (BARC)