CHICAGO — Detroit sent out a request for proposals soliciting debtor-in-possession financing to a targeted group of lenders late last week, but they will remain confidential.
The city, which filed for Chapter 9 bankruptcy July 18, sent the RFP to more than a dozen banks and other financial institutions that provide DIP loans.
The city is seeking to raise $250 million to cover the termination costs of interest-rate swaps hedging $800 million of the city's pension certificates under the city's proposed settlement. The remainder would serve as a line of credit to provide working capital and potentially fund city investments.
The city's investment banking firm Miller Buckfire is managing the process. Detroit Emergency Manager Kevyn Orr's office said it was not aware of other similar post-petition Chapter 9 financings.
Based on responses, the city could eventually enter into a non-disclosure agreement with some of the firms leading to discussions over the terms. The agreement protects both the city and the individual financial institutions in a competitive marketplace, sources said.
Casino revenues would represent part of a package the city would offer to guarantee repayment of the loan.
DIP financing is common in corporate restructurings under Chapter 11 when a company is in need of funds to finance the bankruptcy case and maintain operations.
In Chapter 11 bankruptcies, the DIP lender may receive a super-priority lien on all of a debtor's assets that comes ahead of secured creditors in the case. Such status typically raises the ire of those creditors. A DIP that traps designated revenues and is structured as a senior secured loan lessens the opposition of secured creditors.
Provisions exist in the Chapter 9 code that allow, with bankruptcy court approval, for such a senior secured loan backed by collateral, but they have largely gone untested. Market participants have said the use of a DIP would raise a new set of questions in the Detroit case.
"The materials and our communications with potential lenders will be confidential, although any financing approval process will be very transparent, going through the court's and the city's processes," Orr spokesman Bill Nowling said of the DIP.
Lawyers for Detroit and creditors opposed to its proposed interest-rate swap settlement met with a mediator Thursday. Orr was then deposed on Friday.
The city's proposed settlement with the two counterparties that hedge the swaps has sparked strong challenges from several bond insurers and the holders of the certificates covered by the swap. The deal calls for the city to pay UBS AG and Merrill Lynch 75 cents on the dollar in swap termination fees, currently estimated at around $300 million. In return, the city would gain access to about $175 million in annual casino revenues.
U.S. Bankruptcy Court Judge Steven Rhodes bolstered Orr's plans in a recent ruling that allows the city to retain access to the casino revenues during the dispute over the proposed swap settlement. The settlement is also important because it paves the way for use of the casino revenue as collateral on the DIP loan. Rhodes hopes mediation will resolve the dispute ahead of a Sept. 9 hearing on the swap settlement.
Attorneys for Gov. Rick Snyder and Treasurer Andy Dillon filed motions Friday asking Rhodes to quash a recent request for depositions on the case.
The American Federation of State, County, and Municipal Employees Local 25, the largest city employee union, filed a motion last week asking for the deposition of Snyder, Dillon and other state officials to clarify the decisions leading to the city's bankruptcy filing. The request is part of the union's challenge to the city's eligibility to enter into Chapter 9 protection.
The Michigan attorney general's office Friday filed a request asking the court to protect Snyder and other officials from having to testify, saying they would not be able to offer any relevant testimony and that the eligibility determination was made only by Orr, the Detroit emergency manager. The state asked Rhodes for an expedited decision on whether to allow the subpoenas.
Union attorneys Sunday objected to the state's motion to quash, arguing that it's needed to clarify the timeline leading to the historic Chapter 9 petition.
"AFSCME is not seeking to pursue a fishing expedition through discovery, but needs to preserve its rights to obtain any information that AFSCME deems relevant to its objection to eligibility," union attorneys said in the brief.
