Bond Insurer Syncora Threatens to Cancel Coverage on Detroit Rate Swaps

By Steven Church | March 19, 2014

Syncora Guarantee Inc., the bond insurer fighting Detroit’s debt-cutting plans, said it may cancel insurance it wrote for interest-rate swaps that the city is seeking to terminate with an $85 million settlement.

Under a deal announced last month, Detroit would pay the swap counterparties, UBS AG and Bank of America Corp.’s Merrill Lynch unit, about $85 million of the $288 million it may owe them. Syncora asked the judge overseeing the city’s bankruptcy to reject the settlement, in part because the accord lets the banks seek insurance to cover any losses.

“The swap counterparties’ actions have materially prejudiced Syncora and, for various reasons, compromised the swap counterparties’ ability to claim under the swap insurance in the future,” the New York-based company said in a March 17 filing in U.S. Bankruptcy Court in Detroit.

The threat is the latest tactic employed by bond insurers in Detroit’s record $18 billion municipal bankruptcy. Syncora, Financial Guaranty Insurance Co., Ambac Assurance Corp. and National Public Finance Guarantee Corp. face hundreds of millions of dollars in claims should the city win approval of its plan to pay creditors less than they’re owed.

“It’s hardball,” said Brian Charles, a debt and equity analyst who covers bond insurers and specialty finance companies. “I don’t mean to imply it’s unfair. It’s serious. Syncora is taking the situation seriously.”

‘Uncharted Territory’

Threatening to cancel coverage is unusual for a bond insurer and shows the industry is in “uncharted territory,” said Charles, of New York-based R.W. Pressprich & Co.

“The city disagrees with the characterizations and legal arguments made by Syncora and other insurer litigants,” Bill Nowling, a spokesman for Detroit’s emergency financial manager, Kevyn Orr, said in an e-mail yesterday. “The city will respond to each and every objection and accusation in its court pleadings.”

Stephen Hackney, a lawyer for Syncora, didn’t immediately respond to an e-mail requesting comment on the filing.

William Halldin, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment on the filing. Claire M. Papanastasiou, a spokeswoman for Bingham McCutchen LLP, the law firm that represents Zurich-based UBS, also declined to comment.

General Obligation

Since filing for bankruptcy in July, Detroit has battled municipal unions, retired city workers, bondholders and insurers over cuts. The insurers have sued the city for deciding to treat general obligation bonds as unsecured debts, have opposed the swaps deal and are fighting Detroit’s attempt to cancel the $1.44 billion pension-obligation bonds that underlie the swaps.

The swaps were designed to protect against rising interest rates by requiring the banks to pay the city if rates climbed above a certain level. When rates fell, Detroit had to make monthly payments that have cost taxpayers $200 million since 2009.

U.S. Bankruptcy Judge Steven Rhodes in January rejected as too costly a proposal to pay $165 million to end the swaps. That was a reduction from a deal reached days before the city’s bankruptcy filing to pay $230 million.

This month, Detroit came back to the court with the agreement to pay $85 million in installments. The deal would free up revenue from casino taxes that was otherwise going to be used to secure the swaps payments.

In its objection, Syncora said the new deal is so different from the original two proposals that it should be rejected. Other creditors, including a committee of retired city workers, also oppose the settlement.

Consolidation Request

Rhodes in December affirmed the city’s eligibility to adjust its debts through bankruptcy. Opponents including municipal unions and retired workers have filed seven separate challenges to that decision with the U.S. Court of Appeals in Cincinnati. Detroit yesterday day asked court to consolidate the appeals or extend the city’s time to respond to them.

Without consolidation, the opponents’ briefs would collectively total 147,000 words, while the city’s would reach 98,000, according to Detroit’s filing.

“This court should not have to wade through 147,000 words addressing these identical or closely related issues, all of which are raised by parties with essentially indistinguishable interests,” Detroit said in its filing. “The city should not be forced to bear the expense of responding to such a mountain of briefing either.”

Word Limits

The city proposed solutions including having the opponents file a single 20,000-word principal brief and 10,000-word reply brief, while Detroit would submit a 20,000-word brief.

If the court declines to fully consolidate the appeals, the city requested that its reply deadline be extended to June 17 from May 27. Orr has said he wants the bankruptcy finished by September, when he can be removed from his post by Detroit’s city council.

The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

–With assistance from Andrew Harris in federal court in Chicago.

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