CHICAGO — Detroit in a court filing Thursday announced it has reached a deal with Barclays Capital Inc. for a $120 million loan to finance improvements to city services.
The deal comes after weeks of negotiations with Barclays to revise terms of an original $350 million debtor-in-possession deal reached last October.
The key change to the DIP loan — besides the smaller size — is a change to the collateral backing the financing. The new deal drops a pledge of the city's casino revenues, which U.S. Bankruptcy Judge Steven Rhodes said cannot be used for the city's "working capital," and which are currently pledged to the city's interest-rate swap counterparties.
The city's income taxes and asset proceeds are the loan's new collateral.
The asset pledge specifically excludes the city owned Detroit Institute of Arts' art collection or the city's water and sewer system. Asset proceeds are defined as any net proceeds generated from a sale or privatization of any city-owned asset for over $10 million.
The income tax lien exempts the portion of the tax that is transferred into the city's police budget for retaining and hiring police officers, roughly 0.2% of the resident income tax and 0.1% of the non-resident income tax, according to the court filing.
The loan, structured as financial recovery bonds, will be the city's first financing obtained in bankruptcy, one emergency manager Kevyn Orr says is key to long-term rebuilding efforts.
Detroit hopes to pay it off after exiting Chapter 9 with another, post-bankruptcy deal. Proceeds will finance improvements to services that Detroit argues are key to its future recovery.
The deal gives Barclays a senior secured super-priority claim above all other claims, as is common in DIP loans. It matures in 2.5 years or when the city exits bankruptcy, whichever is earlier.
The city will deposit all pledged income tax revenue into a separate bank account controlled by the bond trustee. The term sheet features a lengthy list of default events. Like the original deal, the interest will be based on the London Interbank Offered rate plus 2.5%, plus a 1% LIBOR floor, translating into an effective rate of 3.5%. The terms include an additional 3% "market flex" for a 6.5% ceiling.
Barclays plans to resell the debt after the deal closes.
The city's Thursday filing notes that the super-priority claim may not include proceeds from a property tax millage dedicated to the city's unlimited-tax general obligation bonds, if the court finds that the GO bondholders are allowed that money, or that the city cannot use the money for any other reason than for payment on the GO bonds. The city is in litigation with bond insurers over the issue.
Rhodes still needs to approve the new loan. The Detroit City Council will also review it — though its approval is not required — and the state's Local Emergency Financial Assistance Board must approve it.
Rhodes approved the $120 million DIP loan in January, while rejecting the rest of the original $350 million loan that was to finance a termination of the city's interest-rate swaps.
In approving the $120 million so-called quality of life loan, Rhodes said the loan is in the best interest of the city and that its terms are market terms that were negotiated in good faith. But the judge also ruled that Michigan law prohibits using casino tax as collateral on a financing for the city's "working capital."
In light of the ruling and the fact that the casino revenues are still pledged to the swaps, Detroit and Barclays spent several weeks negotiating for a new deal.
The city said it after closing it will produce for its creditors a schedule of how it plans to spend the proceeds from the loan. The city's advisors will also "provide a quarterly call for creditors and stakeholders and their financial advisors to discuss the contents of each report," according to the filing.
The city paid Barclays a $4.3 million fee in October, which was non-refundable, and the bank has now agreed to repay the city $1 million of that fee, according to a letter attached to the filing.
If the deal is not closed by April 15, then the bank will not be expected to close the loan unless the city reimburses it for legal fees and there's a new written agreement.
In its filing, the city said it was unable to achieve more favorable terms for a loan. "Given its current financial condition and financing arrangements, the city is unable to obtain adequate financing on terms more favorable than the revised post-petition financing," the filing says. "The city has been unable to obtain unsecured credit" without granting the liens.