August 27, 2014 at 4:38 pm

Detroit offered $4B loan if it uses DIA art as collateral

Kids walk past an Andy Warhol self-portrait at the Detroit Institute of Arts in Detroit. (Brandy Baker / The Detroit News)

A New York-based lender is offering to loan Detroit as much as $4 billion if the city agrees to put up its art collection as collateral.

The offer from Art Capital Group is the latest attempt by outside groups to counter the pledged “grand bargain” that involves $816 million over 20 years that Detroit pensioners would get from private sources and state taxpayers in exchange for shielding city-owned art housed at the Detroit Institute of Arts from a possible bankruptcy fire sale.

In April, Art Capital Group was among a group of investors that expressed interest in buying art or holding it as collateral for a loan to the city through solicitations sought by Financial Guaranty Insurance Co., a bond insurer on the hook for more than $1 billion in Detroit’s pension-related debt. The firm initially offered to loan Detroit up to $2 billion.

But with a trial set to begin Tuesday on Detroit’s bankruptcy exit plan, the firm said it has upped its offer this week to a $3 billion loan — or more.

“We are prepared to increase that amount up to as much as $4 billion if needed by the city,” said Montieth Illingworth, spokesman for Art Capital Group.

Illingworth said the firm’s loan “is a balanced, fair and equitable solution for the city so that it can emerge from bankruptcy with the money it needs” to payoff creditors and finance improvements to city services.

“Only our loan does that,” he said. “The grand bargain doesn’t.”

Under the grand bargain, foundations, corporations and other private donors have committed $416 million over 20 years toward shoring up city pensions in exchange for spinning off the DIA’s assets to a new private entity. The state of Michigan has dedicated a $195 million lump sum payment to the pension rescue fund, the equivalent of $350 million over two decades.

The deal would spare retirees of large reductions in their monthly pensions. Under the plan, general retirees would get a base cut of 4.5 percent and elimination of an annual cost-of-living allowance, while retired police officers and firefighters would see their cost of living adjustment trimmed from 2.25 percent to about 1 percent. In July, pensioners voted in favor of the plan.

Bill Nowling, spokesman for Detroit Emergency Manager Kevyn Orr, said pensioners would lose the outside funding if the city attempted to use the art as collateral for a loan.

“The city is 100 percent committed to the grand bargain because it is the only way to provide $815 million to shore up pensions and protect the art. The city will not sell or leverage the art,” Nowling said Wednesday in a statement.

“This latest proposal is nothing but a thinly veiled attempt by our remaining hold-out creditors to improve their recovery at the expense of the city’s pensioners and its cultural assets. The Art Capital proposal would force drastic, double-digit pension cuts and kill the $816 million for pensions from the grand bargain.

FGIC and fellow bond insurer Syncora Guarantee Inc. have argued the grand bargain’s 20-year payout is the equivalent of about $400 million in today’s dollars and that more money can be extracted from the city’s art collection through a sale of some or all of the 60,000-piece collection.

Art Capital said it would make the loan at a 5.5 percent to 8.5 percent interest rate, plus the LIBOR benchmark interest rate.

Illingworth said the interest rate “is reasonable given the esoteric nature of the collateral and that the borrower is bankrupt.” He said the firm is willing to make the loan initially “interest free” and stage out maturity rates and amounts loaned.

“There’s a lot we can do to make the loan manageable so that the art collection continues to be protected,” Illingworth said.

Last month, an appraiser hired by FGIC valued the collection up to $8.5 billion — double what Detroit’s appraiser estimated for the art.

On Wednesday, FGIC released a statement calling Art Capital’s latest offer “a game changer” and “a win for all sides.”

“It represents a real and viable solution that could enhance recoveries for all creditors by billions and catalyze the revitalization of the city — while also keeping the DIA collection in Detroit,” FGIC said. “It simply represents an extremely attractive option for all stakeholders and a win for all sides. Choosing to proceed with the inferior ‘grand bargain’ would be opting to disregard common sense at the expense of all parties.”

Orr has argued that selling the art would mean all creditors — not just retirees — would have to split up the proceeds, potentially leading to larger reductions in monthly pension checks for Detroit’s 32,000 vested pensioners.

The trial over Detroit’s bankruptcy exit plan is expected to focus on the legality of the city’s proposal to discriminate against FGIC and Syncora — and nearly wipe out their claims — in favor of city pensioners as part of a proposal to shed $7 billion in debt.

clivengood@detroitnews.com
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