Staff Writer
Columbus CEO

c.2013 New York Times News Service

Detroit said 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 in 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 get out of 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 lowered its termination fee to $165 million, or 43 percent of the true cost.

Unusual provisions in the bankruptcy law gave the two banks the right 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.

“This is an important development for the city and its residents,” Detroit’s emergency manager, Kevyn D. Orr, said in a statement. “It means we can start moving forward on implementing needed investments in public safety and services.”

Detroit has been trying to arrange a type of loan known as debtor-in-possession financing of $350 million to pay for city services during the bankruptcy. Until Tuesday, it was planning to have to spend the first $220 million of the special loan on swap termination fees. Now just $165 million of the loan will be used for that purpose, leaving more than half of the total for city services.

Because the new deal was hammered out in confidential mediation, rather than being imposed by court order, it will not offer legal precedent to other distressed cities hoping to extricate themselves from interest-rate swaps. But the banks’ concessions to Detroit do signal that under certain circumstances, the swap contracts are not unassailable after all.

The new terms must still be approved by Detroit’s bankruptcy judge, Steven W. Rhodes.