CHICAGO – A Michigan board this week authorized key pieces of the $617 million restructuring of the Detroit Public Schools amid lingering market questions over the fate of the district's bonds.
The three-member Local Emergency Financial Assistance Loan Board approved on Tuesday $150 million in loan assistance. It will cover transitional operating costs of the new district that was formed July 1 and followed a board discussion on Monday of the state-approved $617 million overhaul aimed at staving off a bankruptcy filing by the debt-laden school district.
The board on Monday authorized $235 million in school financing stability bonding which will restructure DPS' state-aid backed bonds, and formally transferred DPS assets to a newly formed district called the Detroit Community School District.
The former school district remains in place to continue collecting an operating levy that would go to retire the existing debt which was threatening its solvency.
The loan board rejected an alternative pitched by the old district's Board of Education that would have allowed it to retain power. The board rejected that proposal and endorsed the restructuring recommended by school transition manager, retired U.S. Bankruptcy Judge Steven Rhodes, and signed into law by Gov. Rick Snyder last month.
Municipal Market Analytics said it remains concerned over a lack of detail on the restructuring's short-and long-term impact on the district's bonds.
"The complexity surrounding the split and the allocation of debt and revenue sources raises concerns regarding the execution of the plan to repay bondholders in the short-term," MMA wrote in its weekly outlook distributed Tuesday.
MMA called it "disconcerting" that bondholders must rely on the state but "the odds lean in favor of the state doing what is necessary to avert the default/distressed exchange possibility just weeks after congratulating itself on providing the fix for DPS."
The school stability bonding would refinance about $214 million of outstanding 2011 and 2012 state aid-backed bonds, extending the repayment schedule. "This takeout financing needs to occur in short order [as state aid will soon flow to the new district]….yet few details are forthcoming," MMA writes.
S&P Global Ratings in late June downgraded the rating on those bonds by three notches, with the 2011 bonds falling to BBB from A and the 2012 bonds falling to BBB-minus from A-minus. They remain on CreditWatch with negative implications.
The investment grade ratings are due to the state aid pledge. DPS' general obligation bonds are rated junk.
"The downgrade is based on the pending restructuring of the district and the uncertainty it places on bondholder repayment until a redemption, refunding, or defeasance of the outstanding debt is effectuated," analyst Jane Ridley wrote.
State Treasury officials have said the restructuring of the state aid bonds won't impair principal.
MMA has greater long term worries because the current operating levy would be leveraged to repay the restructured bonds.
"This debt would likely be considered unsecured in the context of a Chapter 9 bankruptcy," MMA said.
The district's existing, non-state aid backed-debt is repaid with an 18 mill levy that expires in 2022 and would require voters to reauthorize it, which poses a "future risk to repayment," MMA said. The state has estimated that repaying the district's existing debts would take 10 years.
MMA also remains concerned that possible fiscal woes the new district may experience could prompt a push to free up the operating levy revenue at the expense of bondholders.
DPS's debt includes $1.5 billion of unlimited-tax general obligation bonds, $199 million in borrowing from the state's School Loan Revolving Fund, and $259 million in limited-tax GO debt paid by district operating revenues, rather than a dedicated debt service levy.
