CHICAGO - Detroit has finalized an agreement with Barclays Capital Inc. for up to $275 million in financing to exit Chapter 9 bankruptcy.
The city notified the court of the exit facility commitment and terms of the private placement with Barclays
The deal comes ahead of the start next week of the court's confirmation hearing on the city's plan of adjustment for its $18 billion of debts.
The city's plan relies on the issuance of financial recovery bonds through the Michigan Finance Authority to provide the exit funding. Barclays would be underwriter and syndication agent for the bonds and the arranger for the exit facility.
Under terms of the private placement, Barclays will purchase the bonds from the MFA. The holder will then launch a one-day secondary market sale similar to a primary offering within 150 days of the closing to establish a fair market value with prices described in the term sheet. Ratings from at least two rating agencies would be sought.
The bonds would formally be called Michigan Finance Authority Financial Recovery Bonds Series 2014 (Exit Financing Bond Facility), according to the court filing.
"Detroit continues to make steady progress in returning to firm financial footing and becoming an attractive place to invest once again," Detroit emergency manager Kevyn Orr said in a statement. "We are very pleased to have secured this exit facility and are encouraged by the reception we received from the broader financial community."
The city said it would use proceeds to pay off the $120 million debtor-in-possession loan it obtained from Barclays during its bankruptcy, to finance reinvestment and revitalization initiatives described as vital to the city's post-bankruptcy recovery, and pay other debts.
Officials have previously said those debts could include $85 million to cover its settlement with interest rate swap counterparties and possibly with its limited tax general obligation holders.
The city anticipates that up to $200 million of the transaction will be tax-exempt, according to the filing. The borrowing would be backed by a first lien on a designated portion of the city's income tax revenues that excludes income tax receipts that fund police. Pledged income taxes will go directly into an account at Comerica Bank under the indenture trustee's control.
The tax-exempt piece would mature in 15 years and the taxable tranche in eight years. Interest-only amortization is limited to the first five years.
The bond covenants would require the city to keep income tax rates at a level sufficient to generate at least 2 times debt service coverage. The bonds will feature a debt service reserve of the lesser of maximum annual debt service, 10 % the bonds' par amount, or 125% of the annual debt service based on a fixed rate.
The initial interest rate on the tax-exempt recovery bonds would be set at the SIFMA Municipal Swap Index rate plus 4.25% with a weekly reset. The taxable bonds will initially pay one-month USD-Libor plus 4.75 % with a monthly reset.
At the primary like offering, the bonds are to be marketed at a fixed rate. The tax-exempt rate would reflect Municipal Market Data's benchmark 15 year yield plus a base spread based on rating levels, and various positive and negative market "flex" positions also based on ratings levels. The taxable rate would reflect the seven-year Treasury note rate, a base spread, and "flex" positions.
If the bonds carry an investment grade level, a "successful syndication" would be considered if the bonds are sold at par plus accrued interest. If the bonds don't carry an investment grade rating from at least one agency, a successful syndication would be considered a par price plus $2.50 per $1,000 with accrued interest. Barclays would keep the spread.
The tax-exempt bonds would feature a 10-year call and taxable a make whole call.
UMB Bank NA is to be bond trustee. The term sheet indemnifies Barclays and its agents against any future threatened litigation tied to the facility arrangement.
Barclays is to receive an underwriting discount of $5.00 per $1,000 par. If the deal falls through, the city is on the hook to reimburse Barclays up to $750,000 for expenses. The deal can be terminated if not closed by Nov. 26 or the parties agree to extend the deadline. Various local and state level authorities must still sign off the terms.
Miller Buckfire & Co., Jones Day, Miller Canfield, Ernst & Young, and Conway MacKenzie Inc. are advising the city on its restructuring.
Separately, the city remained in court-ordered mediation Thursday with the insurers, bondholders, and others involved in the city's $1.5 billion of certificates of participation. The creditors are a key holdout in Detroit's attempt to settle with its major creditors ahead of the trial next week. The city's adjustment plan offers holders just pennies on the dollar.
