Detroit could pay higher loan rate, unsealed letter shows

Reuters

By Tom Hals and Karen Pierog

Nov 18 (Reuters) - Detroit could end up paying almost twiceas much in interest as previously disclosed on a $350 millionloan arranged by Barclays Capital, according to a fee lettermade public on Monday after a judge ordered it unsealed lastweek.

U.S. Judge Steven Rhodes on Thursday thwarted efforts tokeep the cost of a debtor-in-possession (DIP) financing underwraps, noting the so-called fee letter was subject to Michigan'sFreedom of Information Act.

The letter disclosed that Barclays would collect 1.25percent of the loan, but not less than $750,000, for committingto a controversial financing deal with Detroit.

The city and Barclays Capital had requested the fees be kepta secret because the details are commercially sensitive andmight raise the price of the loan.

Barclays declined to comment and the spokesman for the citystate-appointed emergency manager did not immediately respond toa request for comment.

One financial adviser who specializes in restructuring worksaid opponents of Detroit's proposed bankruptcy could object tothe "market flex" provision of the fee letter.

"In Detroit you'll see objections to everything. I wouldn'tbe surprised if you see this market flex become a bigger part ofthe discussion," he said. He said the fees were "not all thategregious" for the size of the loan.

Opponents to Detroit's bankruptcy could try to make theargument that the flex provision essentially allows the intereston the loan to be raised to 6.5 percent from the 3.5 percentpreviously cited by the city.

Barclays is allowed raise the rate within 90 days of theclosing of the loan if the bank is unable to find investors tobuy up to half the loan, according to the unsealed fee letter.

Detroit reached the loan agreement with Barclays, a unit ofBritain's Barclay's Plc, in October, but the deal stillmust be approved by the judge. About $230 million of theproceeds would be used to end interest-rate swaps contracts thatthe city has with Bank of America Corp's Merrill LynchCapital Services and UBS AG. The swaps were related topension debt sold by Detroit.

About $120 million of the DIP financing would be used toimprove city services. The financing would be largely securedwith a pledge of Detroit's income tax and casino tax revenue.The city has said the financing will carry a rate of the LondonInterbank Offered Rate (LIBOR) plus 2.5 percent, subject tomarket fluctuations, the city said in October. The loan termsset the LIBOR at no lower than 1 percent, which is well aboveits current rate.

Bond insurers and others have objected to Detroit's proposalto pay off its swap counterparties ahead of other creditors.

Rhodes, who is overseeing the historic municipal bankruptcycase Detroit filed in July, has scheduled a hearing beginningDec. 10 to decide whether or not to approve the financing.

The Barclays financing was arranged after consideringproposals from 16 potential lenders.

The financial adviser said those that lost out on theopportunity to lend to the city might now present alternativesto the judge with the argument that the "market flex" ratescould make Barclays loan less competitive.

Detroit is the first large U.S. city to seek DIP financingafter filing for the biggest Chapter 9 municipal bankruptcy inU.S. history. Rhodes can rule at any time on whether the citymeets eligibility requirements for bankruptcy, which includeinsolvency and good-faith negotiations with creditors ahead ofthe filing.

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