Banks Agree to Debt Deal with Detroit

Will cut $55 million from contract that is immune to bankruptcy re-negotiations


The struggling city of Detroit said on Tuesday that it had won rare concessions, worth $55 million, from two large banks that sold it a type of financial contract that normally cannot be reduced, even in bankruptcy.

The banks, UBS and Bank of America, have been Detroit's trading partners for several interest-rate swaps, a type of contract that was supposed to lower the city's borrowing costs when it raised $1.4 billion in 2005. That deal is now in tatters, and just before Detroit declared bankruptcy last July, the banks said the city could exit the swap contracts if it paid them about $220 million, which was said to be 75 percent of the true cost. On Tuesday, Detroit said the two banks had agreed, after two days of mediation, to lower the termination fee to $165 million, or 43 percent of the actual cost.

Without the concessions, the banks, under unusual provisions in the bankruptcy law, would have had the power to go after Detroit for the full swap termination fee, about $294 million, even though the city is broke and other creditors are expecting to get pennies on the dollar. The provisions create a "safe harbor" in bankruptcy for traders in derivatives, including swaps. The safe harbor has sometimes been questioned in corporate bankruptcies under Chapter 11, but Detroit's case appeared to be the first time it came to the fore in a Chapter 9 municipal bankruptc