Abayomi Azikiwe, editor of the Pan-African News Wire, outside federal court September 19, 2013. The judge heard objections to the bankruptcy filing., a photo by Pan-African News Wire File Photos on Flickr.
October 21, 2013 at 6:46 pm
Detroit council rejects $350M loan for bankruptcy financing
Christine Ferretti and Chad Livengood
The Detroit News
Detroit — The City Council on Monday voted unanimously to reject a $350 million loan for bankruptcy financing secured by Emergency Manager Kevyn Orr.
Orr announced earlier this month the city secured a loan with Barclays to pay off a pension related-debt and finance improvement of government services while Detroit is in bankruptcy.
The state’s emergency manager law allows the City Council to accept or reject the deal. The six-member council now has seven days to propose an alternative to the state’s local emergency loan board that would reach the same financial result as Orr’s agreement or better.
It didn’t appear Monday the council would offer an alternative. Instead, it will let bankruptcy court proceedings play out. U.S. Bankruptcy Judge Steven Rhodes will have the ultimate say on the deal.
“The reality is, it seems to me, that one could make the argument that an alternative plan is not to act on this at all, but rather to fight on this issue in bankruptcy court,” Councilman Kenneth Cockrel Jr. said, questioning the timing of Orr’s deal.
“Why do this now, before we go into court on Wednesday?” Cockrel added, referring to the upcoming bankruptcy eligibility trial. “The emergency manager hasn’t explained why the agreement should be approved before a federal bankruptcy judge has decided Detroit qualifies for bankruptcy.”
President Pro Tem Andre Spivey added: “If the judge says no (to a bankruptcy), we won’t need this anyway.”
Orr’s deal is intended to end an interest rate swap agreement with UBS AG and Bank of America that was tied to $1.44 billion the city borrowed in 2005-2006 to shore up its pension fund. Orr’s proposal to give UBS and Bank of America between 72 and 80 cents on the dollar in an early bankruptcy settlement has been opposed by retirees, the city’s pension funds and pension debt insurers vying to be repaid money the city owes them.
Detroit listed $18.5 billion in debts and liabilities in its bankruptcy case.
Orr’s spokesman, Bill Nowling, said the council’s failure to support the agreement was disappointing.
“It’s pretty clear we needed this financing to get out of the swaps deal,” he said.
Nowling said the agreement would result in a lower interest rate for debt, free up casino revenue and provide cash to improve city services.
“Any reasonable person would look at that and say it’s a great deal for the city,” Nowling said. “It’s disappointing when there is no support for improving the city from a financial and service delivery standpoint.”
Under the current swaps agreement, Nowling said, the city does not get any casino revenue until after the banks take their cut. Under Orr’s agreement, the casino money stays with the city and is used as a security on the loan, but it’s not used to pay the loan. The funds can instead be invested in city services. The revenues from the casino and income tax would only be used if the city is unable to pay, he said.
An influential bond analyst also questioned the city’s proposed debtor-in-possession financing deal.
“It appears to us that this is a very good deal for the lender and the swap counterparties but less so for the city’s unsecured creditors and its residents,” Matt Fabian of Municipal Market Advisors said in a report released Monday.
“The seeming lack of a tangible recovery plan that improves Detroit’s revenues over the period of the loans renders us skeptical about the city’s ability to repay an amount of this magnitude in a short time frame without causing additional stress to the detriment of city residents and unsecured creditors that may have their recoveries tied to the city’s financial performance,” Fabian said.
The financing was secured from Barclays with income and casino tax revenue as well as cash proceeds from any potential money generated by the possible leasing or selling of city assets exceeding $10 million, Orr has said. Under the terms of the secured loan, the city isn’t required to sell assets, Nowling has said.
Prior to the vote, opponents of the financing agreement, including Michigan Forward Urban Affairs Group, urged the council to reject the deal, claiming it “allows big banks and lawyers to step in front of Detroiters to collect first on city income taxes and casino revenues.”
“We reject this deal proposed by Kevyn Orr,” Brandon Jessup, chief executive of Michigan Forward Urban Affairs Group told the council. “Remember your ideals of reform. ... Reject this deal wholeheartedly.”
Jerry Goldberg, an activist and member of Moratorium Now, also told the council to “fight the banks.”
“It’s only in Detroit, the city hardest hit in the country by the banks, that we are paying them. They aren’t paying us,” he said. “The banks owe us. Let’s fight this.”
After the meeting, Goldberg said the council’s decision marks progress.
“The struggle is still going to be played out in the bankruptcy court,” he said. “But this sends a strong message. ...The people are tired of being ripped off by the banks.”
Barclays is loaning the city $350 million with a floating interest rate of a minimum of 3.5 percent, based on the agreement announced Oct. 11.
Orr’s office has said about $230 million would be allocated for ending the swap agreement at a discount of $60 million, based on their value, which is determined by floating interest rates.
Nowling said the loan is needed to gain Rhodes’ approval for the settlement with the two big banks.
The remaining $120 million from the loan is expected to go toward technology infrastructure at City Hall and improving city services for residents and businesses, Orr’s office has said.
cferretti@detroitnews.com
(313) 222-2069
Staff Writer Bryce G. Hoffman contributed
From The Detroit News: http://www.detroitnews.com/article/20131021/METRO01/310210095#ixzz2iPIu5CWz
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