Detroit could end up paying almost twice as much in interest as previously disclosed on a $350 million loan arranged by Barclays Capital, according to a fee letter made public on Monday after a judge ordered it unsealed last week.
U.S. Judge Steven Rhodes on Thursday thwarted efforts to keep the cost of a debtor-in-possession (DIP) financing under wraps, noting the so-called fee letter was subject to Michigan's Freedom of Information Act.
The letter disclosed that Barclays would collect 1.25 percent of the loan, but not less than $750,000, for committing to a controversial financing deal with Detroit.
The city and Barclays Capital had requested the fees be kept a secret because the details are commercially sensitive and might raise the price of the loan.
Barclays declined to comment and the spokesman for the city state-appointed emergency manager did not immediately respond to a request for comment.
One financial adviser who specializes in restructuring work said opponents of Detroit's proposed bankruptcy could object to the "market flex" provision of the fee letter.
"In Detroit you'll see objections to everything. I wouldn't be surprised if you see this market flex become a bigger part of the discussion," he said. He said the fees were "not all that egregious" for the size of the loan.
Opponents to Detroit's bankruptcy could try to make the argument that the flex provision essentially allows the interest on the loan to be raised to 6.5 percent from the 3.5 percent previously cited by the city.
Barclays is allowed raise the rate within 90 days of the closing of the loan if the bank is unable to find investors to buy up to half the loan, according to the unsealed fee letter.
Detroit reached the loan agreement with Barclays, a unit of Britain's Barclay's Plc, in October, but the deal still must be approved by the judge. About $230 million of the proceeds would be used to end interest-rate swaps contracts that the city has with Bank of America Corp's Merrill Lynch Capital Services and UBS AG. The swaps were related to pension debt sold by Detroit.
About $120 million of the DIP financing would be used to improve city services. The financing would be largely secured with a pledge of Detroit's income tax and casino tax revenue. The city has said the financing will carry a rate of the London Interbank Offered Rate (LIBOR) plus 2.5 percent, subject to market fluctuations, the city said in October. The loan terms set the LIBOR at no lower than 1 percent, which is well above its current rate.
Bond insurers and others have objected to Detroit's proposal to pay off its swap counterparties ahead of other creditors.
Rhodes, who is overseeing the historic municipal bankruptcy case Detroit filed in July, has scheduled a hearing beginning December 10 to decide whether or not to approve the financing.
The Barclays financing was arranged after considering proposals from 16 potential lenders.
The financial adviser said those that lost out on the opportunity to lend to the city might now present alternatives to the judge with the argument that the "market flex" rates could make Barclays loan less competitive.
Detroit is the first large U.S. city to seek DIP financing after filing for the biggest Chapter 9 municipal bankruptcy in U.S. history. Rhodes can rule at any time on whether the city meets eligibility requirements for bankruptcy, which include insolvency and good-faith negotiations with creditors ahead of the filing.
(Reporting by Tom Hals in Wilmington, additional reporting by Joseph Lichterman in Detroit and Karen Pierog in Chicago; Editing by Eric Walsh)