Last month, Michigan's largest city secured a loan of up to $350 million from London-based Barclays, showing that investors still are willing to consider investing in Detroit despite the city's Chapter 9 bankruptcy. In a filing Tuesday, the city said the deal reflects "sound business judgment and should be approved."
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U.S. Bankruptcy Judge Steven Rhodes must first determine that Detroit is eligible for bankruptcy and then must sign off on the financing transaction. Rhodes set a hearing for 10 a.m. Nov. 14 to consider the city's request to file a letter on the deal's fees under seal.
Creditors — including the city's largest employee union, Michigan Council 25 of the American Federation of State, County and Municipal Employees — are expected to object to the deal.
Detroit City Council voted unanimously last month to recommend the state's Emergency Loan Board deny the financing deal but failed to offer an alternative.
To get the loan, which will carry a minimum interest rate of 3.5%, the city had to agree to terms favorable to Barclays, which would get priority over unsecured creditors such as general obligation bonds and pensioners if the city became unable to make payments.
The loan also must be paid off when the city exits bankruptcy, which emergency manager Kevyn Orr hopes to do by September. That raises the possibility that the city expects to free up enough cash flow during the bankruptcy to pay off the loan or expects to complete a separate round of financing to pay off Barclays.
Several events could lead the city to default on the loans, including if the "city ceases to be under the control of an emergency manager for a period of thirty (30) days unless a Trans! ition Advisory Board or consent agreement reasonably determined by (Barclays) to ensure continued financial responsibility shall have been established," according to the agreement.
In Tuesday's filing, the city said it expects to save about $50 million by using the Barclays cash to pay off a pension debt interest-rate transaction called swaps, which UBS and Bank of America Merrill Lynch now hold.
The Kwame Kilpatrick administration committed to pay steady interest rates of about 6% on a $1.4 billion pension borrowing deal, but the deal backfired when interest rates plummeted and the city's credit rating collapsed.
The city pledged its casino taxes as collateral for the swaps in 2009 to avoid an immediate payment of up to $300 million to $400 million, putting the city's most reliable revenue stream at risk.
Miller Buckfire investment banker Ken Buckfire negotiated a deal with the banks to get rid of the swaps for as low 75 cents on the dollar, which would free up the casino revenue to be pledged again.
To get the new money, the city is pledging a combination of income and casino tax revenues and the "net cash proceeds" from any money from the sale of city assets that fetch more than $10 million. Assets would be pledged only if they are sold for cash. The city is weighing the sale of assets such as Detroit Institute of Arts property and parking garages.
The city said it would use some of the money to invest in "blight removal, public safety and technology infrastructure" as part of emergency manager Kevyn Orr's plan to invest $1.25 billion over 10 years in improved services.
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