Detroit workers, retirees and community activists protest the forced bankruptcy of the city on October 23, 2013 outside federal court., a photo by Pan-African News Wire File Photos on Flickr.
November 14, 2013 at 3:14 pm
Detroit bankruptcy judge: Bank's lending agreement must be made public
Chad Livengood
The Detroit News
U.S. Bankruptcy Judge Steven Rhodes ruled Thursday that Detroit cannot keep secret a bank's lending agreement for $350 million while in bankruptcy.
Detroit — The city of Detroit cannot keep secret a bank’s lending agreement for $350 million while in bankruptcy, U.S. Bankruptcy Judge Steven Rhodes ruled Thursday.
Rhodes made the potentially precedent-setting ruling Thursday afternoon from the bench in a dispute over the city’s effort to file under seal a letter from Barclays detailing the investment bank’s fees and interest rate structure for a $350 million loan.
The bankruptcy judge said the city must disclose the document under Michigan’s Freedom of Information Act, which governs municipalities.
“The fact that Barclays for its own competitive reasons wants it to be confidential or thinks that it should be … is really quite irrelevant,” Rhodes said. “It’s even irrelevant that the city may have agreed to keep it confidential.”
The judge later added: “At this point in time, it’s clear enough that there is no such exemption from Michigan’s Freedom of Information Act and therefore this letter is not confidential.”
The city is seeking the loan to pay off a costly $230 million pension-related debt to two other banks and finance investments into city information technology, blight removal and other so-called “quality-of-life” spending while in bankruptcy.
Rhodes has not ruled on whether the city can get the loan, a first-of-its-kind debtor-in-possession financing for a municipality in bankruptcy. On Dec. 10, Rhodes will consider the city’s proposals to borrow the $350 million and pay UBS AG and Bank of America about $230 million to terminate a troubled interest rate swap agreement tied to $1.44 billion the city borrowed in 2005-2006 to prop up its pension funds.
Rhodes held an evidentiary hearing Thursday on the city’s request to file under seal the investment bank’s fees and interest rate structure for potential buyers of the debt. Bond insurers, labor unions and other interested parties scrutinizing the city’s expenses in bankruptcy objected to keeping the terms of the loan secret.
“This is a question of more profit for Barclays or less profit for Barclays versus transparency,” said Samuel Kohn, attorney for Assured Guaranty Municipal Corp., a city bond insurer.
James Saakvitne, a New York-based investment banker at Barclays, testified Thursday the city’s financing costs would rise if potential buyers of the debt know how much Barclays is charging in administrative fees and profiting from the deal.
“We want to keep the provision secret so we can get the city the lowest cost,” Saakvitne said.
Disclosure of the terms of agreement would let competitors “know more about the black box of our pricing,” Saakvitne said.
The publicly disclosed terms of the loan call for a 3.5 percent interest rate for the city, but that is subject to a “market flex” provision designed to allow Barclays to sell the debt at a rate higher than investors are willing to pay.
“It would put us at a competitive disadvantage because now going forward competitors can say ‘Ah ha, we know how much Barclays charges in (debtor-in-possession) financing,’ ” he said.
Saakvitne later acknowledged that if Barclays is unable to repackage and sell the debt to investors, that the bank will be “on the hook” for completely financing the deal.
“It’s very important for us to be there to help the city,” Saakvitne told the judge.
“Hold on,” Rhodes replied. “What’s very important to you is to make money.”
“Yes,” the banker replied. “But I don’t think we necessarily would have chosen to put in a provision that if the court ruled one way we would walk away from our commitment.”
Rhodes noted that disclosing the information may lead to lower costs for Barclays’ future borrowers.
“They could end up with a lower cost, yes,” Saakvitne testified. “The concern is if going forward on a municipal (debtor-in-possession) that if all fees are going to be made public that may put a real chill in the market.”
“So much for being willing to help the city, huh?” Rhodes replied before dismissing Saakvitne from the witness stand.
clivengood@detroitnews.com
(517) 371-3660
http://twitter.com/ChadLivengood
From The Detroit News: http://www.detroitnews.com/article/20131114/METRO01/311140122#ixzz2kgr0HbFg
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