CHICAGO – The Detroit City Council Monday unanimously rejected a $350 million debtor-in-possession loan that emergency manager Kevyn Orr wants to use in part to shed the bankrupt city’s interest-rate swaps. The council’s move doesn’t kill the deal, but does delay it.
The council now has seven days to propose an alternative plan that raises the same amount of revenue to the local emergency financial assistance loan board, under the state’s emergency management law.
The loan board has 30 days to review both proposals and approve the “one that best serves the interest of the public in that local government,” according to the law.
The council considered the resolution Monday afternoon, 10 days after Orr unveiled the proposal, before rejecting it unanimously. “Why anybody would want to put the banks above the retirees is just unbelievable,” council member JoAnn Watson said.
Kenneth Cockrel Jr. asked why the council would approve the deal just two days ahead of crucial eligibility trial in the city’s bankruptcy. “Why do this now?” he asked.
“We should have a deal that has all of our creditors at hand,” said council member Brenda Jones. “What it’s doing is making the banks richer and the city and the retirees poorer.”
The deal features a super-priority lien for Barclays on income tax and casino revenues as well as proceeds of more than $10 million on any sale of the city’s assets.
The city plans to use $230 million of the proceeds for termination payments on a series of interest-rate swaps that currently have a lien on the casino revenue. The city would pay the counterparties roughly 75 cents on the dollar for termination payments to shed the swaps.
Another $120 million of the DIP loan would be used for service improvements.
The financing still requires approval by the federal bankruptcy court.
The $350 million of notes carry an interest rate based on the London Interbank Offered Rate plus 2.5%, plus a 1% LIBOR floor, translating into an effective rate of 3.5%. If the city defaults, the spread rises by another 200 basis points.
The notes mature in 2.5 years, or when the bankruptcy case is dismissed or a plan of adjustment is accepted, whichever is earliest. It’s yet to be determined if the loan will be tax-exempt. The city is required to use any proceeds over $10 million from an asset sale to redeem the notes.
As is common in DIP financings, Barclays would get super-priority lien above all administrative expenses, post-petition claims, and pre-petition unsecured claims.
The deal includes a so-called lockbox structure, where the casino and income tax revenues will flow first into a bank account controlled by Barclays. In the event of a default, $4 million of each revenue stream will be set aside , and the city could continue to access the rest.
The term sheet features a lengthy list of events of default. If the city ceases to be under the control of an emergency manager for 30 days, for example, it would be considered a default unless Barclays determines that a transition advisory board or consent agreement ensure continued financial responsibility.
Detroit cannot seek additional borrowing with a senior lien or a lien on any of the notes’ collateral.
In its weekly market outlook, Municipal Market Advisors said the DIP loan seems to be “a very good deal for the lender and the swap counterparties but less so for the city’s unsecured creditors and its residents.”
“The seeming lack of a tangible recovery plan that improves Detroit’s revenues over the period of the loans renders us skeptical about the city’s ability to repay an amount of this magnitude in a short time frame without causing additional stress to the detriment of city residents and unsecured creditors that may have their recoveries tied to the city’s financial performance,” MMA said.