Detroit Finds Ap­petite for its Junk-Rated Bonds

The Bond Buyer - - Front Page - By Nora Colomer

Detroit priced $135 mil­lion of spec­u­la­tive-grade bonds in its first stand­alone deal since bank­ruptcy, at lev­els bet­ter than the city an­tic­i­pated, said John Hill, the city’s chief fi­nan­cial of­fi­cer.

“We knew that as a re­sult of the in­vestor con­fer­ences that we had re­ally good in­ter­est in the bonds,” Hill said in an in­ter­view after the bonds priced Tues­day. “We priced at about 4.8% which out­per­formed Trea­surys so we are very, very pleased.”

The city had orig­i­nally planned to sell $112 mil­lion of new money un­lim­ited tax gen­eral obli­ga­tion bonds, but

boosted the size to $135 mil­lion on the back of in­vestor de­mand. The yield on the 10-year in the deal landed at 4.45% with a 5% coupon, about 194 ba­sis points over the MMD triple-A bench­mark, and 111 bp over the triple-B. The 20-year landed at 4.95% with 5% coupon, 190 bp over the triple-A and 103 over the triple-B based on bench­marks at mar­ket close yes­ter­day.

The deal came with rat­ings of Ba3 from Moody’s In­vestors Ser­vice and B-plus from S&P Global Rat­ings. The city was pre­pared to pay 5.5% to 6%.

Hill said that the bonds were over­sub­scribed across all ma­tu­ri­ties and that 30 in­vestors placed or­ders.

Howard Cure, di­rec­tor of mu­nic­i­pal bond re­search at Ever­core Wealth Man­age­ment, said that pric­ing on the bond was “about in-line with how a Ba3-rated bond should price.”

“Detroit came to mar­ket on a very good day and its deal seems to have been well-re­ceived,” said Lisa Wash­burn, a Mu­nic­i­pal Mar­ket An­a­lyt­ics man­ag­ing di­rec­tor.

“The Detroit deal did well when you con­sider that the city had one the largest bank­ruptcy fil­ings in the mu­nic­i­pal bond mar­ket about five years ago,” said Daniel Berger, a se­nior mar­ket an­a­lyst with TM3/MMD and Refini­tiv, the fi­nan­cial and risk busi­ness of Thom­son Reuters in an e-mail. “These bonds may have been as­sisted by the bond mar­ket rally but there has not been much mu­nic­i­pal bond is­suance in the high-yield sec­tor. “

Berger said that Detroit in­vestors de­manded a high in­ter­est rate from these stressed oblig­ors sim­i­lar to in­vestors in the re­cent sale of Chicago Board of Ed­u­ca­tion GO bonds which sold last week. Chicago’s junk-rated school sys­tem sold 5-year bonds for a yield of 4.16 per­cent, or 1.95 per­cent­age points more than what top-rated bor­row­ers pay.

Gold­man Sachs was lead man­ager. Citi and Siebert Cis­neros Shank & Co were co-man­agers. Miller, Can­field, Pad­dock and Stone, Plc was bond coun­sel. Hill­top Se­cu­ri­ties was fi­nan­cial ad­vi­sor.

The bonds are part of $225 mil­lion in tax-ex­empt bor­row­ing the city coun­cil has au­tho­rized. The re­main­ing bonds are pro­jected to be is­sued in 2021.

City of­fi­cials have said achiev­ing bond mar­ket ac­cess with­out the sup­port of state aid or some other backup mech­a­nism was the next big fis­cal step for the city, which ex­ited bank­ruptcy in late 2014 with a debt re­struc­tur­ing that im­posed big hair­cuts on bond­hold­ers.

The city’s UTGOs re­main in junk ter­ri­tory de­spite up­grades that have ac­knowl­edged fis­cal strides since the city ex­ited Chap­ter 9. In May, Moody’s In­vestors Ser­vice up­graded the city’s is­suer rat­ing to Ba3 from B1. S&P rates Detroit B-plus. Both as­sign sta­ble out­looks.

Hill said in­vestors had some ques­tions about de­mo­graph­ics and pub­lic schools — con­cerns out­lined in a re­cent Moody’s re­port — but he be­lieves in­vestors saw the up­side.

“It is a good time for us to come out with a trans­ac­tion but I also think Detroit is a com­pelling story,” Hill said. “It’s a new mile­stone and it shows an in­ter­est in the city’s fu­ture, be­cause it was over­sub­scribed.”

Moody’s warned in a Nov. 8 re­port that an em­ploy­ment and tax rev­enue surge down­town has not spread through­out the city. It es­ti­mates Detroit has lost about 35,000 res­i­dents since 2010.

The rat­ing agency has also warned that the cap­i­tal needs of Detroit’s pub­lic school sys­tem pose a threat to the city’s “post-bank­ruptcy eco­nomic re­vi­tal­iza­tion” un­less the state or the phil­an­thropic com­mu­nity step in with fund­ing. The school sys­tem was res­cued by the state gov­ern­ment and now has very lit­tle fund­ing to make badly-needed im­prove­ments to its build­ings and in­fra­struc­ture. For fis­cal 2019, the district has bud­geted just $9 mil­lion in cap­i­tal ex­penses out of a bud­get of roughly $760 mil­lion.

The city has also launched a redemp­tion of­fer for bonds it is­sued in 2014 as part of its bank­ruptcy exit pack­ tar­get­ing $131 mil­lion of nearly $632 mil­lion of se­ries 2014B fi­nan­cial re­cov­ery bonds that ma­ture in 2044. ◽

Bloomberg News

Wood­ward Av­enue in Detroit. The city priced $135 mil­lion of lim­ited tax gen­eral obli­ga­tion bonds Tues­day.

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