By Dow Jones Business News, October 11, 2013, 05:05:00 PM EDT
By Katy Stech and Matthew Dolan
Detroit officials announced plans Friday to take out a $350 million bankruptcy loan from Barclays PLC ( BCS ) in a deal
that would make it the first major U.S. city to borrow money while in Chapter 9.
In a press release, city leaders said they plan to spend about $120 million of the proposed loan on city upkeep such
as keeping streets clean and boosting public safety measures as officials work to restructure the $18 billion debt load
that has built up over decades of economic decline.
Most of the $350 million loan would pay a termination fee to banks who have agreed to end a financial agreement that
gave the city a fixed interest rate on some of its pension debt. Ending that agreement is expected to save the city
millions of dollars each year, city officials have said.
Detroit has been constrained in part because both the state and federal governments declined to provide a bailout or
loans, and current state laws restrict how much Michigan can lend its largest city.
Bill Nowling, spokesman for Detroit Emergency Manager Kevyn Orr, said the city council will have a chance to weigh in
on the deal and could offer alternatives that match the cost savings. A state loan board and the federal judge handling
the city's bankruptcy case are also expected to weigh in before the deal is finalized.
Bankruptcy Judge Steven Rhodes will also likely have to approve the borrowing before the city can begin spending the
Unlike in Chapter 11 corporate restructurings, post-petition financing hasn't been a common feature in the bankruptcy
cases of the some 60 cities, counties and other traditional municipalities that have filed for Chapter 9 protection
Some municipalities, most recently Jefferson County, Ala., have proposed entering into new borrowing deals to
refinance existing debt at the end of their bankruptcy cases, but that money isn't intended to fund a municipality's
operation during the Chapter 9 case itself.
Businesses that file for Chapter 11 protection to reorganize often take out so-called debtor-in-possession financing.
Such financing is considered a safe bet for banks because it's secured by all of a company's assets and is first in line
to be repaid.
A municipality such as Detroit may have fewer assets to offer potential lenders as collateral and couldn't simply hand
control of itself to the lenders, as sometimes happens in Chapter 11 cases when there isn't enough cash available to
Detroit's Chapter 9 filing on July 18 made it the largest U.S. city ever to file for bankruptcy, surpassing the
300,000-resident city of Stockton, Calif., which filed last year.
City officials have blamed its financial problems on the loss of residents, who fled in large numbers for its safer
suburbs. Tax revenue left, too, and the intake further plunged during a real-estate crash and as state aid slowed.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to
Write to Katy Stech at firstname.lastname@example.org and Matthew Dolan at email@example.com
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