The City of Detroit has asked that Eastern District of Michigan Bankruptcy Judge Steven Rhodes approve new financing for a loan to be taken out after the filing of the city’s bankruptcy case.
Chapter 13 bankruptcy is a reorganization plan that pays back an individual’s creditors over a three to five year period. Much like in the City of Detroit’s Chapter 9 bankruptcy filing, individual debtors in Chapter 13 also have to seek permission of the bankruptcy court in order to obtain credit after the filing of the bankruptcy case.
Chapter 13 debtors should always first contact their bankruptcy attorneys and then their attorneys with documentation evidencing terms of the loan to be taken.
From there, the bankruptcy attorney will contact the bankruptcy to seek a stipulation. If no stipulation to approve post-petition credit can be reached, the bankruptcy attorney will then file a motion with the bankruptcy court to approve the new line of credit.
Here, the City of Detroit has no bankruptcy Trustee, so the approval of the post-petition credit must pass by motion and then addressed by the bankruptcy court by way of the bankruptcy judge.
DETROIT — The city of Detroit officially asked a federal judge Tuesday to approve a deal to borrow up to $350 million to pay off a disastrous interest-rate transaction from 2005 and improve city services.
Last month, Michigan’s largest city secured a loan of up to $350 million from London-based Barclays, showing that investors still are willing to consider investing in Detroit despite the city’s Chapter 9 bankruptcy. In a filing Tuesday, the city said the deal reflects “sound business judgment and should be approved.”
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STORY: Myths, truths about Detroit’s bankruptcyU.S. Bankruptcy Judge Steven Rhodes must first determine that Detroit is eligible for bankruptcy and then must sign off on the financing transaction. Rhodes set a hearing for 10 a.m. Nov. 14 to consider the city’s request to file a letter on the deal’s fees under seal.
Creditors — including the city’s largest employee union, Michigan Council 25 of the American Federation of State, County and Municipal Employees — are expected to object to the deal.
Detroit City Council voted unanimously last month to recommend the state’s Emergency Loan Board deny the financing deal but failed to offer an alternative.
To get the loan, which will carry a minimum interest rate of 3.5%, the city had to agree to terms favorable to Barclays, which would get priority over unsecured creditors such as general obligation bonds and pensioners if the city became unable to make payments.
The loan also must be paid off when the city exits bankruptcy, which emergency manager Kevyn Orr hopes to do by September. That raises the possibility that the city expects to free up enough cash flow during the bankruptcy to pay off the loan or expects to complete a separate round of financing to pay off Barclays.
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DAY 6 BANKRUPTCY TRIAL: Emergency manager defends June talk about pensionsSeveral events could lead the city to default on the loans, including if the “city ceases to be under the control of an emergency manager for a period of thirty (30) days unless a Transition Advisory Board or consent agreement reasonably determined by (Barclays) to ensure continued financial responsibility shall have been established,” according to the agreement.
In Tuesday’s filing, the city said it expects to save about $50 million by using the Barclays cash to pay off a pension debt interest-rate transaction called swaps, which UBS and Bank of America Merrill Lynch now hold.
The Kwame Kilpatrick administration committed to pay steady interest rates of about 6% on a $1.4 billion pension borrowing deal, but the deal backfired when interest rates plummeted and the city’s credit rating collapsed.
The city pledged its casino taxes as collateral for the swaps in 2009 to avoid an immediate payment of up to $300 million to $400 million, putting the city’s most reliable revenue stream at risk.
Miller Buckfire investment banker Ken Buckfire negotiated a deal with the banks to get rid of the swaps for as low 75 cents on the dollar, which would free up the casino revenue to be pledged again.
USA Today: http://www.usatoday.com/story/news/nation/2013/11/05/detroit-bankruptcy-borrowing/3448411/
