Nov 18 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
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
Dec. 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