Detroit Seeks Loan That Moody’s Calls Unprecedented

Detroit sought court permission to borrow $350 million to help fund its record municipal bankruptcy, a loan that Moody’s Investors Service Inc. called “unprecedented.”

The city, in a filing in U.S. Bankruptcy Court in Detroit, said most of the loan would be used to buy out interest rate swaps that have cost the city about $50 million a year. Moody’s, in a report for investors released today, said the city’s proposed use of financing known as a debtor-in-possession loan is unusual compared to corporate bankruptcies.

“The impact of the proposal on the city’s existing creditors, as well the city’s near-term financial position and long-term financial recovery, are difficult to assess at this point given the number of contingencies that remain,” Genevieve Nolan, a Moody’s assistant vice president, said in a statement today.

Detroit, Michigan’s biggest city, sought bankruptcy protection in July 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 annual $12 million payments on the proposed loan would be far less than the $50 million the city would save each year by buying out the swaps, Detroit told U.S. Bankruptcy Judge Steven Rhodes in its filing yesterday.

Bill Nowling, a spokesman for Detroit’s emergency manager, Kevyn Orr, didn’t immediately respond to an e-mail seeking comment on the report.

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 Bruce Bennett, a bankruptcy lawyer who is among the attorneys leading Detroit’s case.

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