Detroit Will Re­turn To Mar­ket

The Bond Buyer - - Front Page - By nora Colomer

Detroit is plan­ning its re­turn to the mar­ket by year’s end with a $112 mil­lion is­sue that would mark its first stand-alone bor­row­ing since its his­toric 2013 Chap­ter 9 bank­ruptcy fil­ing.

The city coun­cil has au­tho­rized a to­tal of $255 mil­lion in tax-ex­empt bonds over the next five years to fi­nance cap­i­tal projects.

It plans to is­sue $112 mil­lion of new money un­lim­ited tax gen­eral obli­ga­tion bonds by De­cem­ber and the re­main­ing bonds will be is­sued in 2021.

The De­cem­ber deal would be the city’s first since 2010 with­out some form of state sup­port.

“We are not en­hanc­ing that bor­row­ing; it will be on the city’s credit,” said John Hill, Detroit’s chief fi­nan­cial of­fi­cer. “We think it is im­por­tant for the city to get back into the mar­ket on its own credit.”

Hill plans to leave the city gov­ern­ment in De­cem­ber. He was hired in 2013.

That credit re­mains junk-rated, though Detroit has im­proved its fis­cal stand­ing a bit since emerg­ing from bank­ruptcy in late 2014 af­ter shed­ding a sig­nif­i­cant por­tion of its li­a­bil­i­ties, in part by cram­ming down its bond­hold­ers.

In May, Moody’s In­vestors Ser­vice up­graded the city’s is­suer rat­ing to Ba3 from B1. It as­signs a sta­ble out­look.

In De­cem­ber, S&P Global Rat­ings up­graded the city’s is­suer credit rat­ing to B-plus. The out­look is sta­ble.

Detroit’s vot­ers au­tho­rized the $250 mil­lion of bor­row­ing more than a decade ago. It will be used to fund cap­i­tal projects out­lined in the city’s cap­i­tal agenda.

Gold­man Sachs is the lead man­ager.

Citi and Siebert Cis­neros Shank & Co are the co-man­agers.

Hill said that the city is work­ing on its in­vestor push

and of­fi­cials will go to Chicago and Bos­ton to mar­ket the bonds.

Hill said the city is pre­pared to pay 5.5% to 6% on the bonds.

“Detroit prob­a­bly should be is­su­ing bonds given the cur­rent mar­ket con­text,” said Mu­nic­i­pal Mar­ket An­a­lyt­ics Man­ag­ing Di­rec­tor Lisa Wash­burn.

“I sus­pect that the bonds will be well-re­ceived by in­vestors not­with­stand­ing their abysmal treat­ment in the city’s bank­ruptcy,” she said. “Buy­ers should prob­a­bly con­sider that his­tory when mak­ing their in­vest­ment de­ci­sion. But mar­ket par­tic­i­pants are likely to worry about the fu­ture later.”

Howard Cure, di­rec­tor of mu­nic­i­pal bond re­search at Ever­core Wealth Man­age­ment, said Detroit shouldn’t have to pay an ex­or­bi­tant in­ter­est penalty.

“I still think that since rates are still rel­a­tively low, there will be enough in­ter­est from in­vestors to make this a suc­cess­ful deal,” he said. If rates con­tinue to rise, the city’s ad­van­tage could di­min­ish, he said.

Long-term credit risks linger for Detroit, ac­cord­ing to Wash­burn.

The forms they take in­clude weak de­mo­graph­ics, ques­tions about its abil­ity to sus­tain eco­nomic growth, a com­ing pen­sion fund­ing in­crease, and con­cerns that the state’s gov­ern­ment may cause prob­lems for the city’s.

“An in­vestor is es­sen­tially mak­ing a bet that the strong fi­nan­cial poli­cies im­ple­mented by the city will re­main in place even un­der a new ad­min­is­tra­tion,” said Cure.

“Also, that the city ad­dresses their un­der­funded pen­sions and con­tin­ues to grow eco­nom­i­cally,” Cure said. “Based on the cur­rent tra­jec­tory, I think the bet is that the city could even­tu­ally re­turn to in­vest­ment-grade rat­ings. That is in no way as­sured.”

Hill said that it is pos­si­ble the city would also look to do a re­fund­ing on some of the city’s lim­ited tax gen­eral obli­ga­tion bonds be­fore the end of the year.

“We are not sure what the siz­ing on that is go­ing to be be­cause we need to get a sense on the in­ter­est we have on it,” Hill said.

“If there is a lot of in­ter­est then it makes sense for us to take­out more than less,” he said.

Detroit is au­tho­rized to is­sue up to $500 mil­lion in lim­ited tax gen­eral obli­ga­tion bonds for the pur­pose of re­fund­ing or re­fi­nanc­ing all or a por­tion of its out­stand­ing LTGO bonds.

The LTGO bonds in­clude $245 mil­lion of in­come tax-backed bonds, $360 mil­lion of 1st and 3rd lien dis­tributable state aid-backed bonds, and $632 mil­lion of B Notes.

The un­se­cured bonds were used to pay off var­i­ous cred­i­tors.

Is­sued as term bonds, the debt has a 30-year ma­tu­rity, and bears in­ter­est at 4% for the first 20 years and 6% for the last 10 years.

Pay­ments are in­ter­est-only for the first 10 years and start amor­tiz­ing prin­ci­pal in year 11.

John Hage­man, Hill’s chief of staff, said in an e-mail that the city will only pro­ceed with the trans­ac­tion if it meets its ob­jec­tives.

“If the City does pro­ceed, then the City plans to do this be­fore the end of the cal­en­dar year, but does not ex­pect the pric­ing to hap­pen con­cur­rently with the new money UTGO bonds,” he said.

Hage­man said that Gold­man Sachs would be lead man­ager on the re­fund­ing trans­ac­tion.

Detroit’s Down­town Devel­op­ment Author­ity is sep­a­rately work­ing on a trans­ac­tion to re­fi­nance the se­nior debt on Lit­tle Cae­sars Arena, also ex­pected be­fore the end of the cal­en­dar year.

The un­der­writer has not yet been se­lected for the DDA trans­ac­tion.

The orig­i­nal Se­ries 2014A bonds in the amount of $250 mil­lion were is­sued through the Michi­gan Strate­gic Fund and the bonds have a manda­tory call at Jan­uary 1, 2019. ◽

”I sus­pect that the bonds will be well-re­ceived by in­vestors not­with­stand­ing their abysmal treat­ment in the city’s bank­ruptcy,” said Lisa Wash­burn, man­ag­ing di­rec­tor at Mu­nic­i­pal Mar­ket An­a­lyt­ics.

Bloomberg News

The Spirit of Detroit mon­u­ment. The city is plan­ning its first stand­alone bond sale since its Chap­ter 9 bank­ruptcy.

“We think it is im­por­tant for the city to get back into the mar­ket on its own credit,” said John Hill, Detroit’s chief fi­nan­cial of­fi­cer.

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