CHICAGO — Troubled Michigan school districts may find more affordable market access under legislation signed into law by Gov. Rick Snyder that insulates certain types of bonds from the effects of bankruptcy.
The legislation mirrors similar bills passed earlier this year to help cash-strapped Michigan municipalities enter the market without paying too steep an interest rate penalty for bankruptcy risks.
The new laws feature an enhanced intercept structure to boost bondholder confidence by creating an extra layer of security that makes it likely debt repayment would be protected in a Chapter 9 filing.
“The intent is to add additional comfort to lenders that increases the likelihood that if there were a bankruptcy for school districts using this structure, that the payment stream — the state aid — would be insulated from the effects of the bankruptcy,” said Amanda Van Dusen, principal with Miller, Canfield, Paddock and Stone PLC, a law firm that has worked on several of the measures with the enhanced intercept feature, including the school district bills.
“It is intended to protect the revenue stream in the event of Chapter 9, but we’ve never had a bankruptcy in the state of Michigan, so whether a court would rule that way, we don’t know,” she said.
The two-bill package Snyder signed this week addresses short-term notes that are backed by state aid and issued through the Michigan Finance Authority for cash-flow purposes. The school district needs to be under emergency management or have a state-approved deficit elimination plan.
The legislation includes language strengthening the state pledge that would be familiar to bankruptcy judges in both the private and public sector, Van Dusen said. “It’s a bunch of phrases that you might look at and say, 'Ho hum,’ but these are words that bankruptcy courts in the past have recognized as providing a benefit to holders of debt where the revenue stream is being intercepted,” she added.
Sponsored by Rep. Fred Durhal Jr. of Detroit, HB 5194 and 5195 were originally crafted on behalf of Detroit Public Schools. DPS officials began pushing for the bills a year ago to assuage concerns of Assured Guaranty Ltd., which insured $219 million of notes issued in 2004 and rolled over into long-term debt in 2005.
Assured had warned DPS that it would begin accelerating payments on the insured debt in 2012 unless the Legislature passed the enhanced-security legislation by December 2011.
An Assured spokesman was not able to comment by press time. District officials did not return requests for comment.
Though originally aimed at helping DPS, the final law is broad enough to increase market access for all school districts that are under emergency management or have a state-approved deficit elimination plan.
A spokesman for Durhal said the law was a “much easier and cleaner way” for fiscally pressured school districts to borrow. “Our school districts are more than happy to get this as another tool in their toolbox,” said Durhal chief of staff Gary Pollard.
The Highland Park School District is the only other Michigan school district other than DPS that is under emergency management. The state is reviewing the Muskegon Heights School District’s finances to see if a fiscal emergency exists.
“This legislation supports our mission to put Michigan school districts, including DPS, in the best possible position to meet their fiscal challenges,” Snyder said in a statement.