According to documents filed recently, Barclays Capital will provide $275 million to help finance Detroit’s operations as it emerges from its bankruptcy.

The Agreement

Michigan Finance Authority will issue financial recovery bonds for $275 million. Barclays will then buy them at an underwriter’s discount – which adds up to roughly $1.4 million. Barclays, as the sole underwriter, will have 150 days to resell the bonds via a syndication and public offering. A portion of the proceeds will be put towards retiring  a $120 million loan. This loan, also from Barclays, was used by Detroit for its operations while in Chapter 9 bankruptcy. Another portion of the proceeds will be used to pay the city’s obligations to two classes of bankruptcy creditors. And the remaining amount of the proceeds will be put towards making public improvements to help the city’s long decline.

Protecting Investors

The city has also agreed to take steps to protect investors buying the recovery bonds. Workers in Detroit pay an income tax. The city is pledging tax revenue brought in by that will be used to make good on the bonds. And to ensure city officials don’t spend the income-tax revenue first, money raised via taxes will be sent to indenture trustee, Comerica Bank. Comerica Bank will put the money in a special account that is covered by a first priority statutory lien so that the money can be used to benefit bondholders. There is also a portion of this income-tax revenue that has been dedicated to hiring and retaining police officers. According to the term sheet, Comerica will retain the tax revenue until there is enough money to make coming bond payments. And after that amount of time, the city will be able to transfer all remaining revenue to accounts.

Responses

The city has received 10 responses to requests for exit financing proposals. Kevyn Orr, the city’s emergency manager during the bankruptcy, said “the city’s viability as an attractive investment.” The bankruptcy exit plan is set to go before Judge Steven Rhodes next week. Before the exit plan can be put into practice, the plan must be confirmed by the court.