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US judge rules $85 million Detroit swaps settlement is 'reasonable'

A U.S. Bankruptcy Court judge on Friday approved Detroit's third try at settling costly interest-rate swap agreements that helped lead the city into the biggest municipal bankruptcy in U.S. history.

The banks will also join a growing list of supporters for Detroit's plan to adjust $18 billion of debt and other obligations. With this deal in place, along with a settlement with three bond insurers, the city now has more supporters among key creditors to get out of bankruptcy.

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Judge Steven Rhodes, who rejected two previous proposed settlements as too expensive for the broke city, said the $85 million that Detroit would pay UBS and Bank of America unit Merrill Lynch Capital Services is "reasonable."

Downtown Detroit.
Getty Images
Downtown Detroit.

Wednesday, Detroit said it reached a settlement with three bond insurers over the treatment of voter-approved general obligation bonds.

As part of that settlement, the insurers agreed to vote in support of the city's debt adjustment plan, as well.

Rounding up support for the restructuring plan from the banks and insurers could ultimately ease the way for the city to exit bankruptcy. If enough creditors approve the plan, then Detroit could force its terms on the creditors who object to it.

Rhodes concluded that objections by bond insurer Syncora Guarantee, European banks that own some of the pension debt, the city's retired workers, and others lacked merit.

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Those objecting had said the investment banks would fare better than Detroit's other creditors who face steeper losses in the bankruptcy case. Creditors also questioned the legality of a lien on casino tax revenue that Detroit granted to the banks in 2009 to stop them from forcing the city to pay as much as $400 million to end the swaps.

Detroit will pay the $85 million to the banks over time, ultimately freeing up the casino revenue for critical city improvements and services. The previous settlements rejected by the judge had been much higher, at $230 million and $165 million.

A court spokesman says federal Judge Steven Rhodes will render his decision Friday morning on the city's agreement to pay $85 million to UBS and Bank of America.

Rhodes has denied earlier proposals for $220 million and $165 million settlements.

By Reuters