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Thomson Reuters: Detroit Seeks Unprecidented $350MM Loan

September 03, 2013, 07:11 AM
Filed Under: Bankruptcy

Thomson Reuters reports Detroit, which made the largest Chapter 9 municipal bankruptcy filing in U.S. history, on filed a request for proposals for $350 million in unprecedented financing, the city emergency manager's office said. Detroit is the first large U.S. city to seek so-called debtor-in-possession (DIP) financing after asking for bankruptcy court protection.

The city plans to use about $250 million to terminate a complicated swaps deal related to previous bonds issued to finance pension debt, said Bill Nowling, press secretary for Detroit's state-appointed emergency manager, Kevyn Orr. The termination of the swaps payment would be made to Merrill Lynch, a unit of Bank of America, according to the article.

The state's emergency manager law grants to Orr most of the powers once afforded to the city's mayor and city council, including responsibility for the city's finances.

Detroit heads to a trial in October to prove it is eligible for bankruptcy. The city filed for Chapter 9 protection in mid-July.

On Wednesday, U.S. Bankruptcy Judge Steven Rhodes, who is overseeing Detroit's bankruptcy petition, cleared the way for the city to seek approval next month of the $250 million swaps deal that will give it unencumbered access to its casino revenues.


Under Chapter 9 of the bankruptcy code, which covers the rare municipal bankruptcies, there is no real precedent for a DIP loan. As a result, there is no blueprint for determining the collateral the city can pledge, and how much power the judge has to enforce a lender's rights if Detroit defaults.

The only example of a municipal bankruptcy loan that turned up in a search of court records by Reuters was Prichard, an Alabama city with about 30,000 residents, which received court approval for a loan in 2000 during the first of its two recent bankruptcies.

The lack of precedent may make the loan a tough sale or may prompt lenders to demand control of the bank account receiving the casino revenue, lawyers told Reuters. DIP loans in corporate bankruptcies are often used to as a way to control a restructuring, and it was through a DIP loan that the U.S. Treasury guided the 2009 bankruptcies of GM and Chrysler.

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