CHICAGO — The federal judge overseeing Detroit's bankruptcy approved a controversial $120 million loan with Barclays that the city says is key to kickstarting its revival.
The ruling means the city can move forward with its first borrowing since it filed for bankruptcy last July.
U.S. Bankruptcy Judge Steven Rhodes okayed the so-called quality of life loan during a hearing on the matter Wednesday morning.
It was the first of two hearings this week on key deals for the bankrupt city.
On Thursday Rhodes will consider the city's $85 million settlement with its interest-rate swap counterparties UBS AG and Merrill Lynch Capital Services Inc. Bond insurer Syncora Guarantee Inc. had requested that the hearing be delayed, but Rhodes rejected the request Wednesday.
The $120 million debtor-in-possession loan and the interest-rate swaps settlement are considered key hurdles for the bankrupt city as it moves through the largest municipal bankruptcy in U.S. history.
If the court approves the swaps deal, it means Detroit will have the acceptance of at least one impaired creditor class of its bankruptcy debt plan. That's enough to impose a cramdown on the rest of the city's creditors.
Emergency manager Kevyn Orr has said the loan is necessary to begin to rebuild the struggling city with investments in everything from new police and fire vehicles to blight elimination.
"This court has previously held that the city is service-delivery insolvent," Rhodes said when he approved the loan, according to various local press reports. "It is not providing services to meet the basic needs of its citizens, and this loan will provide the city with the means to begin to make up that deficit."
Creditors objecting to the loan questioned whether the city was getting the best deal and argued that the terms were different enough to require a new hearing. The use of the proceeds remained unclear, creditor attorneys argued.
Rhodes dismissed the concerns, saying Detroit had demonstrated the need for the money.
With court approval in hand, Detroit is expected to try to close the Barclays loan by April 15.
After that, the city would be required to take on the bank's legal expenses and fees. The debt matures either when the city exits bankruptcy or in 2.5 years. Detroit expects to pay it off with a $300 million post-bankruptcy financing.
The loan is down from an original $350 million deal proposed last October, and pledges the city's income taxes as collateral instead of gambling revenue. The city will pay an interest rate based on the London Interbank Offered Rate plus 3.5%, with 3% market flex built in. Barclays plans to resell the debt after the deal closes.
Detroit on Monday filed a revised plan of debt adjustment and disclosure statement. The revisions, which featured lower recovery rates for bondholders and most pensioners than the original plan, prompted a request from Syncora and the city's other major creditors to delay by at least 10 days an April 14 hearing on the disclosure statement.
Rhodes said Wednesday he understood creditors' concerns and would post a new schedule that would give parties more time.
The revised bankruptcy plan would impose 85% haircuts on general obligation bondholders.
The new plan is worse than the original one, attorney Vince Marriott, with Ballard Spahr, LLP, who represents a group of European banks that hold some of the city's pension certificates, told Rhodes.
"The city has been trying to beat creditors into submission" Marriott said.
Also Wednesday, Rhodes said he would send out applications for a municipal finance expert to weigh in on the feasibility of the city's final plan.
