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Detroit Will Sell New Sewer Bonds in the Midst of Bankruptcy

MAR 24, 2014 12:10pm ET
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CHICAGO — The Detroit Water and Sewerage Department plans to come to market with $150 million of new-money sewer bonds in June.

The deal is planned despite existential questions about the water and sewer system's future amid Detroit's bankruptcy.

The Michigan Finance Authority will act as the conduit on the deal. Proceeds will finance capital improvements for the year.

A restructuring of the system's outstanding $4 billion of debt could also be on the horizon as a consequence of Detroit's Chapter 9 proceedings.

The Michigan Department of Treasury issued a request for proposals seeking underwriters for the deal on March 12. Responses are due Tuesday.

The borrowing comes at a crucial time for the department, which is the object of heated negotiations between the city and adjacent counties. Detroit emergency manager Kevyn Orr wants to lease the system — one of Detroit's strongest assets — to a new regional authority in exchange for an annual payment. The deal has stalled amid disputes over capital costs, uncollected bills, and other disagreements.

Expected proceeds from some form of privatization of the DWSD are key to Detroit's overall bankruptcy exit plan.

The financial advisor is FirstSouthwest, according to Nicolette Bateson, the chief financial officer at DWSD. Officials hope to choose an underwriter in the next few weeks and close the deal by the end of June, Bateson said.

Officials are waiting for underwriter proposals before settling on a structure, she said.

"In Chapter 9, nothing is usual," said Bateson. "So we're looking forward to the proposals the underwriters bring back to us and what they can bring to the table for our ideal funding needs."

The system's outstanding debt carries junk-level underlying ratings from the three ratings agencies.

The plan for a new authority relies in part on a restructuring of all outstanding debt. Orr has proposed that the refinanced debt would place debt service below annual lease payments to the city.

The RFP for the upcoming deal asks underwriters to consider various options such as an interim or long-term transaction, a public offering or private placement, as well as the anticipated spreads to Municipal Market Data benchmarks, necessity and availability of credit enhancement, marketing plan and proposed schedule, and other ideas.

The state also asks the banks to present any recommendations on restructuring the system's current debt, "taking into consideration the city's filing for bankruptcy protection under Chapter 9 and its anticipated exit in fall 2014 for both the creation of a regional water authority and DWSD remaining as a department of the city," the RFP says.

Proposals should also include a present value savings analysis, modifications to the exiting bond indenture, and any ratings implications.

Resources from the State Revolving Fund are also being considered.

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DWSD is building for contractor NEFCO a 140 million dollar facility to dry sewage sludge and take it to a landfill, which DWSD was doing in house. This is the reason for the bond. The strategy is to raise the rates to the ratepayers and enrich NEFCO,
Posted by Saulius S | Monday, March 24 2014 at 3:59PM ET
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