CHICAGO — Junk-rated Detroit will turn to Michigan for help in issuing up to $100 million of general obligation bonds to finance the purchase and renovation of a former MGM Grand casino into a new police headquarters.
The City Council signed off on the measure last week with support from Mayor Dave Bing.
The debt would carry a subordinate lien on the city’s state revenue aid, and be sold to the Michigan Finance Authority. The MFA would then offer bonds with the same features on the open market. The borrowing might be part of a pooled program with other local municipalities.
The transaction is scheduled for September. Siebert, Brandford, Shank & Co. will underwrite the deal.
Detroit, which has not issued GO debt in three years due partly to its below-investment-grade status, would use some of the proceeds for various capital projects.
The debt would be structured as unlimited-tax GO bonds, paid from property taxes but carrying a pledge of the state revenue sharing aid. City officials hope the state aid pledge — as well as the use of the MFA to issue the debt — will enhance the marketability of the bonds.
Under early financing details, Michigan would agree to set aside sufficient state aid to cover debt service in a trust, releasing the money to Detroit’s general fund once the city covers the payment with property tax revenue.
The bonds would be subordinate to $250 million of primary-lien state aid bonds the city sold in March to help eliminate its deficit.
The Michigan Finance Authority, the state’s main bond-issuing agency, plans to market the bonds through its local government loan program. The deal represents the first time Detroit has tapped the MFA program.
The state may sell the bonds as part of a pooled offering or may offer the debt on its own, said City Council fiscal analyst Irvin Corley Jr.
In addition to the boost Detroit receives from the state enhancement, the city will also benefit from lower issuance costs.
“The state thinks they can probably help the city get a lower interest rate by offering the bonds,” Corley said.
He estimated that Detroit would pay a 6.3% interest rate on the bonds. The ordinance approved by the council last week also gives the city the ability to issue the bonds as taxable Build America Bonds or recovery zone economic development bonds. Corley estimated the city would pay an interest rate of 4.1% on BABs and 3.47% on the recovery zone bonds, with the federal subsidy figured in.
The ordinance does not allow the city to enter into interest-rate swaps on the debt.
The debt is part of the city’s GO bond authorization of $160 million that voters approved two years ago.
Detroit plans to buy the former casino from MGM Grand Detroit LLC for $6.9 million. Renovations are expected to total up to $70 million. That includes roughly $20 million to build a state crime lab for the Michigan State Police.
Remaining proceeds would be used for a variety of other capital projects, including lighting, cultural facilities, and transportation projects.
The City Council passed the measure on a 5-to-4 vote. Critics said the cash-strapped city should not take on more debt.
