Detroit Wins $350M DIP Loan from Barclays

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CHICAGO -- Detroit Friday announced it has secured $350 million of debtor-in-possession financing from Barclays, the first deal of its kind for a bankrupt municipal issuer to date.

The city will use the money to pay off a series of interest-rate swaps and invest in city services, officials said.

The deal is contingent on Federal Judge Steven Rhodes’ ruling that the city is eligible for bankruptcy relief.

It also depends on the city’s ability to terminate its interest-rate swaps under a proposed settlement with counterparties that is being fought by bond insurers. The bankruptcy court and the Detroit City Council must also approve the deal,

The city’s finance team contacted more than 50 financial institutions over the last month to try to secure the loan.

It received proposals from 16 lenders, including investment banks and hedge funds.

Barclays offered the “most advantageous” deal based on structure and pricing, the city said.

The loan is backed by a pledge of the city’s income taxes as well as casino revenue -- currently pledged as collateral on the interest rate swaps -- and any proceeds over $10 million that come from the privatization of an asset.

The $350 million loan carries an interest rate based on the London Interbank Offered Rate plus 2.5%, with a 1% LIBOR floor, according to the city. The bonds mature in 2.5 years. The city will also have to pay an undisclosed “commitment fee” for the loan.

“Barclays will be given a claim on the borrowing that has priority over all administrative expense claims, all other post-petition claims, and pre petition unsecured claims,” the city said in the announcement.

The loan will be structured as financial recovery bonds.

If approved, the city will use $230 million of the loan to terminate the interest-rate swaps hedging its pension certificates. The remaining $120 million will be used to “advance certain key investment initiatives of the city aimed at improving basic services to Detroit’s residents and businesses and the technology infrastructure of the city’s government,” the city said in a release.

“Today is another important step in the continued revitalization of Detroit,” emergency manager Orr said in a statement. “We said at the outset of this process that we are committed to improving the financial condition of Detroit and the lives of its 700,000 citizens, and our team worked tirelessly to bring this significant post-petition financing to bear. We are very encouraged by the level of interest we received from the financial community, its implicit support of the work we are doing and their desire to participate in the ongoing recovery of one of America’s great and vibrant cities.”

The city’s investment banker, Miller Buckfire & Co., and its legal counsel, Jones Day, led the effort to secure the DIP financing.

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