Detroit Tender a Default: MMA Says

CHICAGO - Detroit's voluntary tender program of its water and sewer revenue bonds may have provided an "optimal solution" for the market but it still represents a default, Municipal Market Advisors said Monday.

Municipal Market Advisors earlier this month outlined its view position that the tender offered an alternative means of default for Detroit and elaborated on it Monday after reviewing the results. The tender offer ended Aug. 21.

Some buyers agreed to accept less than par and MMA said that equates to a default. "A voluntary tender based default is a softer precedent for the market than a cram-down by the bankruptcy court, but less than par is a default," said Matt Fabian, managing director at MMA.

Detroit said it pursued the tender and restructuring as an alternative to its proposed impairment in its plan of adjustment of nearly 50% of the $5.2 billion water and sewer bond portfolio. Once it completes the restructuring, all remaining bonds will be considered unimpaired and the affected creditors will drop their opposition to the city's proposed plan of adjustment.

Bondholders tendered about $1.5 billion of bonds, representing 28% of the district's debt, between Aug. 7 and Aug. 21. The Detroit Water and Sewerage Department said it targeted $2.2 billion of bonds. The city is expected to issue bonds as soon as Tuesday to purchase the tendered debt, refund callable bonds, and raise $190 million in new money. The city expects to trade in junk bond ratings on the existing bonds for investment grade level on the refinancing.

Municipal Market Advisors in its weekly outlook called the DWSD?approved tender "likely the optimal solution for the market as a whole." It averts a legal precedent of impairing special revenue bonds in Chapter 9, facilitates Detroit's scheduled exit from bankruptcy, and eliminates the risk of protracted litigation regarding the DWSD bonds.

Based on the circumstances and facts of the tender, MMA said it still believes that the plan puts DWSD in payment default. MMA called it the largest municipal default in its database and said details of the tender veer from those of a traditional voluntary buyback offer.

"The consistent desire by Detroit's restructuring team to extract value from DWSD for its general fund at the expense of bondholders, negotiations with the ad hoc bondholder committee, threat of the Plan of Adjustment cram down if the tender failed, and peculiarity of the characteristics of the bonds tendered distinguishes this from a typical voluntary tender offer," MMA wrote.

"Indeed, it seems more like a mediated workout/settlement. And when bondholders get less than par in a workout, we consider the issuer to have defaulted regardless of the bondholders' complicity in determining the outcome," it continued.

MMA said it appeared a group of bondholders agreed in negotiations to tender their bonds, some at less than par, to enable the refinancing for savings.

"The significant percentage of bonds tendered at below par, 10% when below par offers were made on only 3% of bonds, is supportive of our view that negotiated concessions were made by bondholders," the report reads.

The firm called it reasonable that some bondholders would participate in the tender out of concern they may lose value should the court cram down a solution that impairs their holdings and others many have found the price attractive. "However it is suspect that over 6% of the tendering universe are unimpaired bondholders accepting below par offers, with some agreeing to tender at prices as low as 79 (cents on the dollar)," MMA wrote.

MMA said it would have a hard time understanding how any rating agency could put an investment grade rating on a parity DWSD offering in the foreseeable future.

Fitch last week struck an opposing position, saying it didn't consider the tender offer a payment default or distressed exchange. "The proposed treatment in the POA was intended to create an opportunity to call bonds at par that are not currently callable, to achieve savings, and to facilitate a potential conversion of DWSD to a regional utility or, more remotely, a privatized utility," analysts said. "It was not motivated by any financial distress within the DWSD itself," analysts said.

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