CHICAGO — After winning long-awaited approval from a bond insurer, Detroit Public Schools plans to enter the market Thursday with $231 million of one-year notes urgently needed to make payroll through August.
The note sale previously had been prevented by Assured Guarantee Ltd., which insures roughly $170 million of DPS bonds originally issued in 2004 .
Assured had blocked any new borrowing by warning that it would require DPS to pay back the insured debt if the cash-strapped district borrows more money without waiting for the Michigan Legislature to pass a bill that would in essence protect Assured's bonds in the event of bankruptcy.
But the sought-after bill has yet to even be introduced in the Legislature, and DPS emergency financial manager Robert Bobb has said the district won't be able to make payroll without the cash infusion.
Last week Assured agreed to waive its restriction, giving DPS the green light for more borrowing.
Assured's new agreement gives state lawmakers until Dec. 31 to pass the so-called bond-security bill. If the state fails to pass the measure — which, after an initial hearing, appears unpopular with lawmakers — DPS would be required to pay Assured back for the bonds starting in 2012 instead of in June 2011, and pay them off by 2015.
Assured said it agreed to the waiver in light of the district's fiscal position.
"In order to help DPS resolve its current fund crisis, we have agreed to waive the previously required $17 million debt redemption provision by June 1, 2011," an Assured spokesman said in an e-mailed statement. "Our goal always is to assist municipal issuers get cost-effective access to capital markets, while protecting the investors in our insured bonds."
The district faces a $327 million deficit — nearly 65% of its general fund — and has been under state-controlled emergency financial management since early 2009.
In the last few years, DPS has been forced to issue short-term notes twice a year to cover cash flow. This week's borrowing will cover payments through August, when it expects to issue more notes.
The Michigan Finance Authority will price Thursday's deal. The state aid revenue notes will be divided into a $75 million series that matures on Feb. 20, 2012, and a $156 million series that matures on March 20, 2012.
JPMorgan and Siebert Brandford Shank & Co. LLC are underwriters. Dykema Gossett PLLC is note counsel, and Public Financial Management Inc. is financial adviser.
The notes will be subordinate to the Assured-back bonds, which mature in 2020.
Assured insures $170 million of debt issued by DPS in 2005. The original $219 million debt issue, first insured by Financial Security Assurance Inc., now part of Assured, was a deficit financing that converted one-year notes in 2004 into 15-year notes that mature in 2020.
Bobb recently appeared before a joint Senate and House education committee to push lawmakers to pass the yet-to-be-introduced bill. In essence, the measure would insulate from bankruptcy school district debt that is issued as a cash-flow borrowing — typically short term — through the state aid intercept program. The rest of a district's outstanding debt would remain outside the purview of the new law.
Only a bankruptcy judge can ultimately make such decisions, but the bill's language is modeled on past bankruptcy decisions, Amanda Van Dusen, an attorney at Miller, Canfield, Paddock and Stone PLC who is working on the legislation, said in a recent interview.
Only an emergency financial manager such as Bobb is allowed to seek bankruptcy under state law, and he has promised Assured and other investors he would not file Chapter 9 while as he is EFM. But his tenure is expected to end in July.