CHICAGO — Faced with the headline risk associated with ongoing reports over its fiscal struggles, Detroit Public Schools was forced to pay a steep premium Thursday on its sale of $231 million of short-term notes.
Yields on some of its debt reached 6.65%.
The high yields were expected, with talk of bankruptcy swirling around the district, which has now entered its third year under state-appointed emergency financial management.
DPS paid an interest rate of 6.65% on $111 million of state aid revenue notes maturing in March 2012, and 6.45% on $120 million of notes maturing in February 2012.
Officials at the troubled district admitted yields were high but said they were just happy to get the borrowing done. Proceeds will help cover payroll until DPS’ next short-term borrowing, planned for August.
“While the rates were higher than we secured on our 2010 notes, we are pleased this sale allows us to make payroll and meet our obligations,” Robert Bobb, the district’s emergency financial manager, said in an e-mail Thursday afternoon.
He blamed the high rates on DPS’ dire fiscal situation, the fact that his personal pledge not to declare bankruptcy will evaporate at the end of his tenure on June 30, and general market volatility.
Bobb added that investors had concerns that the district could be forced to redeem $170 million of 2005 bonds backed by Assured Guarantee Ltd. unless the Michigan Legislature passes a new law that essentially protects the Assured-backed bonds.
The interest rates on Thursday’s bonds were nearly two points higher than the district’s recent one-year cash-flow borrowings.
Last August DPS sold $187 million of notes at 4.75%, and a $256 million note issue in April 2009 saw an interest rate of 5%.
The bonds are part of the state-aid intercept program, which features a structure that requires Michigan to distribute the aid first to the bond trustee before releasing it to DPS.
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 acted as conduit issuer. JPMorgan was the underwriter.
