By Nathan Bomey, Detroit Free Press
DETROIT — An investor group offered to loan the City of Detroit as much as $4 billion — up from a $2 billion offer in April — to help the city pay off creditors, reinvest in services and emerge from Chapter 9 bankruptcy.
But the deal would require the city to pledge the Detroit Institute of Arts and its collection as collateral to secure the loan — a process that would be highly unlikely considering it would require a legal battle over rights to the city-owned museum’s prized collection.
What’s more, a person familiar with the framework of the deal — proffered by New York-based Art Capital Group — told the Free Press it would likely require Detroit to sell some of the DIA’s artwork to pay off the loan.
Art Capital disputed that suggestion.
“We can structure it to make it affordable and greatly reduce the remote possibility that any sales would ever occur,” Art Capital spokesman Montieth M. Illingworth said in an e-mail Wednesday. “One of our goals here is to ensure that the collection stays in Detroit and stays intact and there are no sales, not one piece. We know that’s important to the city.”
Illingworth said options include allowing interest-only payments in the early years or spreading out the payments over a long period of time.
The timing of the offer, less than a week before Detroit’s historic bankruptcy trial is set to begin on Tuesday, illustrates that holdout financial creditors will attempt to prove the city is not getting enough money for the DIA.
Detroit emergency manager Kevyn Orr wants the city to accept the equivalent of $816 million over 20 years from the state of Michigan, nonprofit foundations and the DIA to reduce pension cuts and allow the museum to spin off as an independent institution. The deal, which has been dubbed the grand bargain, has drawn fierce opposition from bond insurers Financial Guaranty Insurance Co. and Syncora.
The insurers are expected to argue during the city’s bankruptcy trial that the DIA is being given away for far less than it’s worth.
“The city cannot ignore the fact that the Art Capital proposal is a game changer,” FGIC said in a statement provided to the Free Press. “It represents a real and viable solution that could enhance recoveries for all creditors by billions of dollars and catalyze the revitalization of the city – while also keeping the DIA collection in Detroit. It is 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.”
Art Capital’s original offer, which was solicited by FGIC, was for a $2 billion loan to the city at an interest rate of 6 percent to 9 percent, secured by the DIA.
The investor group said today that it had increased its loan offer after an art adviser hired by FGIC, Victor Weiner, recently estimated that the museum’s entire collection is worth more than $8 billion.
The city swiftly dismissed Art Capital’s latest proposal. Bill Nowling, a spokesman for Orr, said the city is “100 percent committed to the grand bargain.”
“The city will not sell or leverage the art,” Nowling said in an e-mail. “This latest proposal is nothing but a thinly veiled attempted by our remaining hold-out creditors to improve their recovery at the expense of the city’s pensioners and its cultural assets.”
ArtVest Partners co-founder Michael Plummer, who was hired by the city to evaluate the worth of the DIA, concluded in a recent expert report that the Art Capital deal was “not economically viable.”
Complicating matters is a bitter dispute about whether the DIA’s property legally can be sold. The museum’s leaders have vowed a legal battle if the city pursues a sale or a collateralized loan.
Of course, if the city can’t establish ownership rights, pledging the art as collateral is not an option.
But Art Capital said the deal is “the only solution on the table in Detroit which enables the city to address the vast scale” of its liabilities. The city listed some $18 billion in debt and liabilities when it filed for Chapter 9 bankruptcy in 2013.
If the city were to default on an Art Capital loan, the firm said it would “do everything we can to keep the DIA’s art collection in the city and intact.”
Bankruptcy law does not allow creditors or the judge to force the city to sell assets, but the judge can reject a plan that does not properly account for the value of assets it chooses to sell.
Photo: ifmuth via Flickr