DALLAS -- The Michigan Finance Authority approved a plan to issue $235 million of debt to refund some Detroit Public Schools bonds before they lose their state aid backing on Oct. 1.
The authority approved an authorizing resolution at a meeting Wednesday. JPMorgan is the lead manager. The bonds are to be backed solely by an existing 18-mill non-homestead levy, MFA officials said.
Matt Fabian, a partner at Municipal Market Analytics, which has been tracking the bonds' status, said the "the investor will be at risk if the levy produced by the 18 mills continues to decline or is disrupted by, for example, assessment appeals in the future. Some kind of state backstop or protection would be needed to make this investment grade."
The Michigan Finance Authority did not provide any comment on whether it intends to backstop the bond refunding.
The MFA said the outstanding bonds will be refunded and defeased at par "plus any applicable redemption premium and accrued interest." That suggests that those bondholders will be made whole. However, the new bonds are unlikely to garner similar ratings if they are shifted from a state-aid backing to being backed solely by a property tax pledge.
The outstanding bonds lost their investment grade status amid uncertainty about the state planned to restructure the debt after the state-ordered restructuring of Detroit Public Schools took effect July 1.
State aid is set to shift to a newly formed district that operates schools while the former district remains intact only to collect taxes and repay bonds.
The operating levy of roughly $50 million to $60 million per year will go to pay off debt service on the refunding bonds, which will retire 2011 and 2012 DPS state aid bonds with a final maturity of 2023.
MFA plans to issue to the refunding bonds on or before September 30, ahead of the state's new fiscal year, when the outstanding bonds lose their state aid backing because, without students, the old district will no longer be able to collect aid. Few additional details were immediately available on the bonds, which are being called local financing stability bonds and are being issued under the MFA's local government program.
The existing bonds had initially carried A level ratings from S&P Global Ratings because of the state aid pledge. They also carried a limited tax general obligation pledge. The district's underlying ratings on its GOs are junk-level.
On Sept. 14, S&P Global Ratings downgraded the bonds to B from BB-minus. S&P said that with the October deadline looming closer and ushering in the new fiscal year, there was greater uncertainty as to whether bondholders would receive full and timely payment on their bonds.
The rating drop marked the third action taken by S&P in as many months. On Aug. 4, S&P lowered the 2011 first lien bonds three notches to BB from BBB and the 2012 second lien bonds to BB-minus from BBB-minus. The action followed a three-notch downgrade of the bonds in July after the new district formally opened its doors under a state-approved restructuring that split the district into two entities. S&P no longer distinguishes the liens in the ratings.
Moody's Investors Service recently revised the outlook on DPS' Caa1 issuer rating to "developing" from "negative". Neither rating agency had an immediate comment on the latest development.
