Detroit Seeks Loan Proposals to Finance Swaps Settlement

Detroit asked 14 banks, hedge funds and other lenders to submit proposals to loan the bankrupt city as much as $350 million so it can end swaps contracts and set aside cash for public services.

Should the city go forward, it would use about $250 million to fund a settlement of swaps contracts with Bank of America Corp.’s Merrill Lynch, Bill Nowling, a spokesman for Detroit’s emergency manager, said in an interview today. The remainder would be reserved to bolster public services such as policing, firefighting and blight removal, he said.

Orange County, California, the last large municipality to borrow while in bankruptcy, used the money to help pay some creditors early and reduce the size of its obligations. That legal strategy was designed by bankruptcy lawyer Bruce Bennett, who is among the attorneys leading Detroit’s case.

Last night, the city sent requests to lenders asking them to submit details about a possible bankruptcy financing package, known as a debtor-in-possession loan, Nowling said.

“These are all people we have been working with over the months and who have been wanting to make a proposal should we seek DIP financing,” Nowling said. He declined to identify any of the potential lenders.

Population Decline

Detroit, Michigan’s biggest city, sought bankruptcy protection after decades of population decline and dwindling manufacturing jobs left it too poor to pay bondholders, retired cops and current city workers. The city said it owes about $18 billion, making it the biggest municipal bankruptcy ever filed in the U.S.

The city plans to guarantee repayment of the proposed loan by treating casino-tax revenue as collateral, Nowling said. The tax brings in about $175 million a year and is the subject of a court fight with bond insurer Syncora Guarantee Inc.

The tax revenue is currently pledged to back interest-rate swaps payments owed investors. To end the payments, the city has proposed canceling the swaps contracts through a settlement with Merrill Lynch and UBS AG. Under the settlement, the city would pay as little as 75 percent of the current value of the swaps, which can change as interest rates rise or fall.

Without the proposed new loan, the city couldn’t fund the settlement, Nowling said. Emergency Manager Kevyn Orr says Detroit can save about $50 million by canceling the contracts. The discounted value of the swaps was about $190 million, according to the city.

Syncora, which insured some of the swaps, claims it may be economically harmed by the cancellation. The judge overseeing Detroit’s bankruptcy case is scheduled to consider the settlement next month.

The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

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