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Deal in Focus

Stimulus Sale for DPS

CHICAGO — Detroit Public Schools emergency financial manager Robert Bobb is promoting an investment in Wednesday’s $210 million sale of taxable stimulus bonds as an investment in both the troubled district and the future of Detroit.

Investors who buy a piece of DPS debt will help finance a high-profile capital campaign that Bobb and officials say will aid in the revitalization of the city with thousands of new jobs.

“The program has been not only a godsend for the school district, but for the city as well,” Bobb said in an interview ­Monday. “It’s truly a stimulus package program for the city of Detroit because of the number of persons employed pursuant to this program.”

The issue consists of $161 million of direct-payment qualified school construction bonds and $49 million of direct-payment Build America Bonds.

The QSCBs feature a 2029 bullet maturity with sinking-fund deposits beginning in 2012. The BABs will consist of one or more term bonds with a 2040 final maturity and sinking-fund payments beginning in 2030.

The district’s finance team took indications of interest Tuesday, and a midday pricing wire offered a yield in the range of 300 basis points above a 4.375% 30-year Treasury bond rate on the QSCBs and 325 basis points above the Treasury rate on the BABs.

Siebert Brandford Shank & Co. and JPMorgan are joint book-running senior managers on the deal.

DPS is among the most fiscally traumatized school districts in the nation and has been under state-ordered emergency financial management since early 2009.

The bonds offered Wednesday carry backing from Michigan’s school bond qualification and loan program as well as the district’s unlimited-tax general obligation pledge — two features officials consider key to attracting bond buyers.

“We think it’s bulletproof for investors,” said Bobb, who has assumed a high profile in his efforts to rehabilitate the school system since becoming emergency financial manager in March 2009.

The state’s backing earned the bonds double-A minus ratings from Moody’s Investors Service and Standard & Poor’s. Before this sale, DPS had roughly $1.5 billion of state-enhanced GO debt outstanding.

Moody’s assigns a B1 to the district’s unenhanced debt — a grand total of $3 million of bonds issued in 1996. Standard & Poor’s does not maintain an underlying rating on the district.

“When people look at investing in this issue, they are not only investing in something backed by the state, but it is backed by an unlimited-tax general obligation pledge to levy whatever taxes are necessary to pay for the debt,” said Kari Blanchett with Public Financial Management Inc., the district’s financial adviser.

The borrowing finances a capital campaign that Detroit officials said is crucial to revive both DPS and the city. The first stage of the campaign includes seven new schools, renovations to 11 others, a new public safety center, and several other smaller projects.

Bobb has projected that it would create 11,000 new jobs for Detroit, which has long been plagued by a double-digit unemployment rate that recently reached 24%, among the highest in the country.

Guggenheim Partners LLC, which is one of the largest buyers of QSCBs and purchased a chunk of Detroit’s last year, visited the district to tour the construction sites financed by bond proceeds, Bobb said.

“They wanted to see what progress was actually being made on the ground,” he said. “We have not been wasting our time, we have been moving very quickly, and we have new schools under construction as we speak.”

Guggenheim representatives declined to comment on whether the firm planned to buy some of Wednesday’s bonds.

Bobb said DPS is considering asking voters for more borrowing authority next year to expand the capital program, especially if the federal government opts to extend the BAB and QSCB programs.

“The federal government has made this very attractive,” he said. “We are debating [more borrowing] internally as we speak, but haven’t made a final decision.”

For bondholders, the specter of the school system possibly seeking Chapter 9 bankruptcy protection has clouded the district’s credit since the idea was first raised by Bobb when he took over early in 2009.

He has since vowed that bankruptcy is not an option as long as he remains emergency financial manager.

“It’s not an issue at all, not even on the table, not even being considered,” Bobb said. “The only advantage to bankruptcy for our district would have been the ability to eliminate the collective bargaining contracts, but we were able to work with all of our credits on that.”

Only the emergency financial manager has the power to declare bankruptcy under state law.

Bobb’s second term will expire in March. Gov. Jennifer Granholm, who will leave office in January, renewed Bobb’s first term last March, and a new governor could renew his term or appoint a new manager when it ends next year.

Despite Bobb’s pledge, bond documents and an investor road show marketing Wednesday’s issue feature discussions on the possibility of bankruptcy.

Bond attorneys said it is likely a court would declare revenue that is set aside for debt payments as special revenue, which would help ensure continued payments on the debt.

If the school system was to declare bankruptcy, “we have advised the district that although the question is not free from doubt, the proceeds of the debt millage should be treated as special revenues under Chapter 9 of the bankruptcy code,” Amanda Van Dusen from Miller, Canfield, Paddock and Stone PLC, the district’s co-bond counsel, told potential investors on the road show.

Lewis & Munday PC is also co-bond counsel.

The special revenue designation would likely mean that the revenues would not be subject to an automatic stay and that the district could continue to use the money to make debt-service payments after bankruptcy.

Van Dusen added that while a bankruptcy plan could modify the payment terms of the bonds or authorize a senior lien above the bonds, it could only do so if the plan adequately protected bondholders.

Wednesday’s offering is part of a $500 million borrowing authorized by voters last November.

The district priced the first piece of that borrowing a month later, selling $290 million of QSCBs and BABs. The direct-payment BABs saw interest rates from 4.59% to 7.47%.

For the tax-credit QSCBs, Detroit ended up offering a supplemental coupon of 3.19% which, with a tax credit rate of 6.06%, meant a total yield of 9.25% for investors.

Bobb noted that 61% of voters approved the ballot measure.

“Detroit voters approved this bond measure at a time when Detroit itself is in a fairly deep recession, which shows the support of the Detroit residents for public education in our city and for improving the facilities,” he said.

The borrowing comes two months after the state approved the district’s plan to eliminate its deficit, which currently totals $363 million under a $994 million budget.

The deficit-elimination plan requires legislative approval and would split the district into two systems.

One would provide a “traditional education setting” and the other, larger system would allow DPS to impose a number of reforms and enter into new financial partnerships, according to a report on the plan filed on the district’s website.

“The goal of the transition plan is to permanently resolve the financial and academic emergencies that currently face the district and to put the district on a path toward enhanced academic performance growth, financial accountability, fiscal solvency, transparency, and strong and sustainable internal controls,” the report said.

The only alternative would mean massive service cuts and layoffs, according to Bobb.

The largest school district in Michigan, DPS is also the largest employer in Detroit, with more than 12,000 employees. Many of its financial problems are due to falling enrollment, which has declined by more than one-third over the last decade to less than 85,000.

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