CHICAGO — Lawyers for bankrupt Detroit and creditors opposed to its proposed interest-rate swap settlement met with a mediator Thursday as the city prepared to reach out to the markets for debtor-in-possession financing to fund the deal's swap termination payments.
An order from U.S. Bankruptcy Court Judge Steven Rhodes, who is overseeing Detroit's historic Chapter 9 filing, barred the parties from discussing the proceedings or any developments during the closed-door session.
Detroit Emergency Manager Kevyn Orr is hoping for a quick resolution of the settlement dispute.
Orr's spokesman Bill Nowling said the city's investment banking firm Miller Buckfire planned to issue a request for proposals this week soliciting interest from financial institutions to raise $350 million in DIP financing.
The city would direct $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. A DIP — while common in the corporate world — is a rarity in municipal government Chapter 9 bankruptcies.
"Our goal is to fund the swap settlement and provide the city with adequate liquidity throughout the restructuring case to start reinvesting in Detroit today," Orr spokesman Bill Nowling said. The city is contacting a range of financial institutions, commercial banks, investment banks and hedge funds. Orr's office said it was not aware of other similar post-petition Chapter 9 financings.
"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," Nowling added.
Nowling said no decisions have been made on what city investments would be funded with the DIP — which would serve as a line of credit the city could draw from as needed.
The Detroit News first reported the plans Thursday after an interview with Orr.
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, considered one of Detroit's most reliable revenue sources.
Rhodes bolstered Orr's plans in a ruling Wednesday that allows the city to retain access to the casino revenues during the dispute over the proposed swap settlement.
Rhodes last week heard arguments from bond insurer Syncora Guarantee Inc. in its attempt to block Detroit's the swap settlement, the only financial settlement Detroit reached before filing for bankruptcy. Detroit has argued that the settlement is key to its fiscal stability as it moves through the historic bankruptcy case.
The settlement is also important because it paves the way for Detroit to raise DIP financing by using the casino revenue as collateral. Market participants have said the use of a DIP would raise a new set of questions in the case as it typically provides the lender with a priority lien which in turn could affect the liens of all Detroit's creditors.
Syncora, which insures the swaps and the certificates, had asked that $11 million in monthly casino revenue be held by the swaps custodian until the court decides on the settlement. The funds serve as collateral on a series of interest-rate swaps that hedge the city's pension certificate debt.
Rhodes ruled Wednesday that Syncora cannot ask for the revenue capture because the insurer is not a party to the swap agreement.
The ruling also overturns one of Syncora's key arguments challenging the proposed swap settlement, which is that the insurer has the right to weigh in on any potential swap termination. Rhodes hopes mediation will resolve the dispute ahead of a Sept. 9 hearing on the swap settlement. Orr said in the news article that if the court approves the settlement he would hope to secure the financing in 60 to 90 days.