Detroit Council Protests Proposed Barclays Loan to Unwind Swaps
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A proposed $350 million loan from Barclays Plc (BARC) to Detroit will head to a state board for consideration under protest from the City Council.
The council approved a resolution today urging U.S. Bankruptcy Judge Steven Rhodes to turn down the tax-backed loan, negotiated by Kevyn Orr, the city’s state-appointed emergency manager. Orr said the financing, which the judge also must approve, will save the city $60 million and free revenue to help the former auto-manufacturing center.
The council Oct. 21 unanimously rejected the Barclays loan, which under state law gave it seven days to propose an alternative to Orr’s deal, which would be used to unwind the swaps tied to pension-related debt to save $60 million and free money for blight removal, public safety and infrastructure improvements. The council didn’t devise another plan, and instead passed the protest statement.
The seven-day requirement didn’t give the council time to come up with an alternative, although “we worked hard to see if we could get a better deal,” president Saunteel Jenkins said today.
“There really is no choice; there really is no democracy,” Jenkins said.
Detroit, which in recent years has been plagued by unreliable buses, broken street lights and long waits for police and ambulances, sought protection from its creditors July 18. With more than $18 billion of obligations, it represents the biggest U.S. municipal bankruptcy filing.
Rhodes is considering arguments on whether Detroit qualifies for protection under Chapter 9 of U.S. bankruptcy law. Any financing plan would need the judge’s approval before it could be implemented.
Under the state emergency manager law, council members have until Oct. 28 to approve an alternate plan that would be an equivalent or better deal for the city than the Barclays loan.
Orr proposed using about $230 million of the financing from the London-based lender to end the swaps with UBS AG (UBSN) and Bank of America Corp. The agreement also would save tens of millions of dollars on debt payments and let the city spend more on such things as better technology, Orr said.
The city would pledge revenue from payroll and gaming taxes to back the loan, as well as the proceeds of asset sales or leases that bring in more than $10 million, according to Orr. He said Barclays agreed to charge interest at the London Interbank Offered Rate plus 2.5 percent for as long as 30 months.
The swaps, tied to $1.4 billion in pension bonds issued in 2005 and 2006, were a bet on the direction of interest rates, to hedge against a possible rise. Because rates fell, the city owes the banks. Under the terms of the contracts, cuts to the city’s credit ratings let the banks demand their termination.
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