Detroit’s State-Issued Recovery Zone Deal a Success

CHICAGO — Pre-subsidy interest rates ranged from 5.1% to 8.4% on $100 million of recovery zone economic development bonds that Detroit sold last week through a Michigan conduit.

The city, which is rated below investment grade by all three rating agencies, accessed the market through the Michigan Finance Authority, the state’s main bond issuer.

Backed by a subordinate lien on the revenue aid the city receives from the state, the bonds were rated A1 by Moody’s ­Investors Service and AA-minus by ­Standard & Poor’s. The bonds also feature a pledge of the city’s full faith and credit.

Detroit officials said the borrowing’s all-in interest rate totals 4.55% after the subsidy is applied under the federal stimulus program.

“We are pleased with the low rates and support our offering received from investors,” chief financial officer Norman White said in a statement. “We issued $100 million in bonds but received orders for approximately $150 million, which is an indication of the confidence investors have in our financial future.”

Siebert Brandford Shank & Co. was senior manager. Robert W. Baird & Co. is the city’s financial adviser.

The bonds were structured as recovery zone economic development bonds, which carry a 45% subsidy from the government to offset interest costs.

Pre-subsidy rates ranged from 5.1% on 2014 bonds to 3.4% on a piece of 2017 bonds and 7.2% on 2022 bonds.

The largest series in the transaction, ­consisting of $77.8 million of bonds with a 2035 maturity, saw an interest rate of 8.4%, 384 basis points over the Municipal ­Market Data index, according to ­Thomson Reuters.

The 2035 bonds were trading with a yield of 8.06% in the secondary market Monday afternoon.

The interest rates on the borrowing were higher than the rates on $250 million of Build America Bonds that Detroit sold earlier this year to erase much of its deficit. Pre-subsidy yields on those bonds ranged from 5% on a chunk of 2015 debt to 5.25% on 2035 bonds.

The deficit bonds feature a first lien on the state revenue aid. As part of last week’s transaction, the city pledged not to issue any more bonds with a first lien on the state aid.

The sale marks the city’s first use of the state as conduit issuer for new-money general obligation debt. Detroit has not issued new-money GO debt in three years, due partly to its below-investment-grade ratings.

The city will use the proceeds to rehab a vacant MGM casino into a new police headquarters.

Mayor Dave Bing described the sale as a “major step forward” for the city.

“It shows that the financial markets believe in what we’re doing to bring fiscal responsibility back to Detroit,” Bing said. “More importantly, it sets the stage for us to make Detroit a safer city.”

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