Detroit Prices Sewer Bonds After Week Delay

CHICAGO — Detroit will pay yields ranging from 1.72% to 5.30% on $667 million of new-money and refunding sewer revenue bonds that the city’s sewer department priced Wednesday.

Yields dropped 10 basis points in a second round of pricing amid demand, according to early-afternoon pricing results.

Yields ranged from 1.72% on 2014 bonds with a 5% coupon to 5.30% on 2039 bonds with a 5.25% coupon, down from 1.82% and 5.40%.

The Detroit Water and Sewerage Department priced the deal Wednesday after delaying it a week as a fiscal crisis threatened to engulf the city when officials warned they might not have enough money to make a scheduled debt payment due to a dispute with Michigan.

Amid the crisis, the finance team opted to push the sewer bond deal back by one week  and purchase insurance from Assured Guaranty Municipal Corp. for some of the debt.

The team also put out additional information for potential investors informing them of the bond insurance, the city’s fresh fiscal problems and a new downgrade from Moody’s Investors Service.

“We’re pleased with the amount of interest in the transaction, and I think giving the market the extra week allowed the news to set in that Detroit is moving forward and concerns about default are off the table,” said Matt Schenk, chief operating officer and chief compliance officer for the sewer department.

“Given the concerns we were looking at last week, the rates are a substantial improvement,” he said.

The department will use more than $300 million of the new-money piece of the deal to make termination payments to unwind interest-rate swaps hedging more than $1.4 billion of sewer debt.

The insured bonds saw slightly lower yields. Uninsured bonds with a 2015 maturity and 5% coupon yielded 2.12% while insured bonds maturing in 2016 with a 5% coupon yielded 2.10%.

Uninsured bonds with a 2039 maturity and 5.25% coupon yielded 5.30% while insured bonds with 2039 maturity and 5% coupon say yields of 5.0%.

The $667 million deal included $500 million of new-money bonds and $150 million of refunding debt. The department tendered $50 million of failed auction-rate debt as part of the transaction. It has another $25 million of debt that remained in failed auction mode.

Goldman, Sachs & Co. was the senior manager on the deal.

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