The fate of Detroit’s watershed settlement with Syncora Guarantee Inc. may hinge on whether the bond insurer can win concessions from other creditors, including Bank of America Corp. and retired city workers.

The agreement, announced in a court filing yesterday, would remove a big obstacle from Detroit’s path to resolving its record municipal bankruptcy and cutting more than $7 billion in debt. The deal with Syncora also leaves fellow bond insurer Financial Guaranty Insurance Co. as the only major creditor opposed to Detroit’s program.

Still, hurdles remain for the Syncora settlement to go through.

Earlier this year, Bank of America’s Merrill Lynch unit and UBS agreed to take less than they were owed by Detroit on soured interest-rate swaps, potentially triggering their right to collect insurancefrom Syncora. The New York-based insurer thinks its settlement with Detroit can’t go forward unless the banks give up their right to insurance, a person familiar with the negotiations said.

Detroit’s representatives, on the other hand, take the position that Syncora can still drop its objections to the city’s debt-reduction plan and go ahead with the settlement no matter what UBS, Bank of America and other creditors decide, said another person familiar with the city’s negotiations.

‘A Decision’

Syncora has a decision to make, the person said. If the company can’t get the banks to forgo theinsurance, it will have to choose whether to continue its fight with Detroit on Sept. 15, when a trial on the fairness and feasibility of the city’s debt-adjustment plan is set to resume.

Both people asked not to be identified because details of the bankruptcy mediation are confidential.

Detroit, a city of about 700,000, filed a record $18 billion municipal bankruptcy last year, saying decades of decline left it unable to provide basic services and still meet financial obligations. Since then, Detroit Emergency Manager Kevyn Orr has cut deals with city unions, retired workers and some bondholders to pay them less than they are owed.

One source of uncertainty in the settlement involves a single element related to insurance Syncora wrote for Charlotte, North Carolina-based Bank of America and Zurich-based UBS for the swaps. The treatment of these claims is “to be agreed,” according to a memo Detroit and Syncora sent to the city council outlining their accord.

Bank Lawyers

Marshall S. Huebner, an attorney for Merrill Lynch, declined to comment on the Syncora agreement. Daniel J. Kramer, an attorney for UBS, didn’t immediately respond to a request for comment. Michael Corbally, Syncora’s chief administrative officer, didn’t immediately return an e-mail requesting comment.

U.S. District Judge Gerald Rosen, who is overseeing mediation, ordered the parties that Syncora has claimed must sign off on the settlement to come to Detroit for a new round of talks.

The deal also requires consent from a committee of retired public workers and investors who hold tax-backed bonds, according to the person familiar with the bond insurer’s position.

Orr’s office sees it differently.

“There is no provision in the agreement between the city and Syncora that is contingent upon approval of a third party,” Bill Nowling, a spokesman for the emergency manager, said today in an e-mail.

Rosen, the chief federal judge in Detroit, ordered the retiree committee and the bond investors to come to court tomorrow for a mediation session.

Final Details

U.S. Bankruptcy Judge Steven Rhodes gave the city and Syncora until Sept. 15 to work out final details of the accord, which would boost the bond insurer’s recovery beyond the 10 cents on the dollar it was offered.

Under the settlement, the city would give Syncora new debt, renew a lease on a tunnel to Canada that the bond insurer controls, turn over a parking structure and give an affiliate of the company land for development.

Detroit’s bankruptcy plan hinges on a bargain with philanthropic foundations and the state government, who agreed to shore up the city’s public pension system with more than $800 million. In exchange, Detroit pledged not to use its art collection to pay debts.

Financial Guaranty has said the city could use the collection to boost payments to creditors whose claims the insurer may otherwise be forced to cover.

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