Detroit won court approval to issue $120 million in bonds to pay for emergency vehicles and basic services while it prepares for a court battle with creditors over how to reduce $18 billion in debt.
U.S. Bankruptcy Judge Steven Rhodes approved the borrowing today at a hearing in federal court in Detroit. The city plans to spend $36.2 million of the money on the police department, $28.5 million on the fire department and $35.6 million on blight removal.
Detroit “is not providing sufficient services to meet the basic needs of its citizens,” Rhodes said. “This loan will provide the city with the means to begin to make up that deficit. The time to begin is now, if not before now.”
Creditors including Syncora Guarantee Inc. (SYCRF:US), which insures some of the city’s debt, have opposed emergency manager Kevyn Orr’s program to restructure Detroit’s finances, including the $120 million loan. They also object to an $85 million deal the city reached with UBS AG (UBSN) and Bank of America Corp. (BAC:US) to end interest-rate swaps that would otherwise threaten the city’s most reliable source of cash: casino taxes. That deal is also going before Rhodes this week.
The city in July filed the biggest U.S. municipal bankruptcy, saying it couldn’t pay creditors and still provide vital services to its 700,000 residents. Under a plan submitted to the court in February and updated last month, Orr proposed cutting the pensions of retired municipal workers and paying some bondholders as little as 15 cents on the dollar.
Later this month, Detroit will seek court permission to organize a creditor vote on its debt-adjustment plan. The city has proposed cutting general employees’ pensions by about one-third, while police and firefighters would see their pensions cut by as much as 14 percent. Retiree cuts will be less severe if they vote in favor of the plan. Municipal unions and pension systems have objected to the proposals.
Orr and other officials have said that after decades of decline and the near-disappearance of manufacturing jobs, city services including street lighting, trash pickup and emergency services are inadequate.
About 60,000 properties, or 15 percent of all parcels in the city, were barren, and at least 78,000 buildings were vacant, including 38,000 deemed potentially dangerous, Orr said in a report last year.
In October, Detroit’s police chief told Rhodes that the city solves only about 11 percent of homicides. Detroit had about 384 homicides in 2012, according to statistics from the Federal Bureau of Investigation.
In December, Detroit won court approval to divert some tax revenue to a lighting authority that would borrow more than $200 million to replace thousands of broken streetlights.
Under the proposal considered today, the city will issue $120 million in bonds that would mature after it wins approval of the debt-adjustment plan.
The bonds were originally proposed as part of a larger financing package designed to fund a deal with Zurich-based UBS and Charlotte, North Carolina-based Bank of America (BAC:US) to terminate the interest-rate swaps for about $165 million. The swaps, secured by casino-tax revenue, have cost taxpayers about $200 million since 2009.
Rhodes in January rejected the swaps accord as too costly and refused to approve the financing that would have funded the deal. He didn’t make a final ruling on the so-called quality-of-life bonds, which pay interest at the London interbank offered rate plus 250 basis points.
Libor is the rate at which banks in London say they can borrow money from each other for a specified period. A basis point is 0.01 percentage point.
Syncora and other creditors oppose the loan and the swaps settlement, saying the new transactions are too different from those Rhodes rejected in January to be approved without giving creditors a chance to collect new evidence.
The swaps, tied to pension obligation bonds issued in 2005 and 2006, were designed to protect against rising interest rates by requiring banks to pay the city if rates climbed above a certain level. Instead, rates fell, leaving the city obligated to pay about $4 million a month.
The swaps agreement, if approved, would ensure that at least one group of creditors supports Detroit’s debt-adjustment plan when it comes up for trial in July. Under the accord, UBS and Bank of America’s Merrill Lynch unit would vote their impaired claims in favor of the plan.
The case is In re City of Detroit (9845MF:US), 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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