By Matt Helms
A federal judge on Wednesday approved a $120-million loan for Detroit to begin spending quickly on critical public services needs, saying the city made the case for what it calls a "quality of life" loan from the London-based investment bank Barclays.
The city sought the loan and renegotiated its terms after a previous agreement with Barclays collapsed. The initial loan included an extra $230 million that would have paid off a controversial pension debt interest-rate transaction from 2005. But U.S. Bankruptcy Judge Steven Rhodes, presiding over the city's historic municipal bankruptcy, rejected that offer and another involving the swaps deal.
The latest settlement between the city and UBS and Bank of America Merrill Lynch to pay off the swaps deal is for $85 million, and Rhodes is scheduled to take up that matter today.
Under the new loan, Detroit no longer pledges vital casino taxes as collateral, which had undercut the initial deal. The city instead is pledging income tax revenue and proceeds of future asset sales. A lawyer for creditors, including several European banks, questioned the necessity of the loan, including whether the city had sufficiently detailed what it would spend the money on and whether better loan terms might have been available.
But Brad Erens, a Jones Day lawyer for Detroit, said the city has multiple needs that it has deferred. The city last week provided a list of $179 million in projects it said would be ready for investment right away. Erens said the city's immediate needs include the maintenance and repair of the fleet of fire and police vehicles and hiring more public safety workers.
"We have actual hard asset projects that are ready to go," Erens said. "This is money that the city intends to spend and has deferred these projects for some time."
Erens also said that the Barclays loan is "the best loan available" for quality of life, even if the city will be paying 3.5% interest on the total value of the loan, no matter how much is spent.
"There's no reason to believe there's a better offer out there," Erens said.
The city has said it would pay back the loan with money freed up after its final bankruptcy exit plan is approved.
Rhodes made it clear that the loan fits in with his emphasis on restoring public services as a top priority in the city's bankruptcy case.
"This court has previously held that the city is service delivery insolvent. It is not providing sufficient services to meet the basic needs of its citizens," Rhodes said from the bench. He said the Barclays loan will begin to address those needs, and "the time to begin is now, if not before now."
Pressed earlier by Rhodes to explain in more detail how it would spend the loan money, the city last week said its largest proposals were:
- $36.2 million for the Detroit Police Department, including more cops, new vehicles, new precinct buildings and equipment such as as radios, vests and Tasers.
- $35.6 million for blight removal.
- $25.4 million for the Detroit Fire Department, including new vehicles and maintenance on its current fleet.
- $24.8 million for the city's General Services Department to hire workers, upgrade parks and its grounds maintenance fleet.
Meanwhile, Rhodes on Wednesday denied a request by one of the city's largest creditors, the bond insurer Syncora, to delay a hearing set for today on a proposed settlement of a disastrous swaps deal from 2005. After twice rejecting earlier proposals, the city reached an agreement to settle the soured deal for $85 million with UBS and Bank of America Merrill Lynch.
Syncora is on the hook for about $620 million in Detroit debt. Rhodes also agreed to set up a panel of three lawyers -- one representing the city and two representing creditors -- who will assist him in interviewing candidates to be an expert witness in the case. Rhodes late last month said he wanted to hire the expert to help him evaluate the feasibility of Detroit's bankruptcy restructuring plan.
Rhodes said he was looking for an impartial expert with municipal finance expertise, no conflicts of interest and a clear concern for Detroit's future. He set a deadline of April 9 for applications and said interviews of candidates are scheduled for April 18 in open court.
In addition, Rhodes moved a hearing date on the city's bankruptcy disclosure statement to April 17 from April 14 after creditors sought more time to review the document, which is a key statement in the city's bankruptcy restructuring plan.
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