CHICAGO — Allen Park, Mich. wants bondholders to sell back $31 million of troubled bonds tied to the city's financial decline and federal securities charges.
The Detroit suburb posted a tender notice on the Municipal Securities Rulemaking Board's EMMA web site inviting bondholders to sell part or all of their 2009 and 2010 limited-tax general obligation bonds. The city will pay the bondholders cash at par plus accrued interest.
Bondholders have until Sept. 16 to offer their debt to the city. Allen Park will announce the next day the results of the program and whether it has accepted all the tendered bonds. The deal will be settled on Sept. 30.
But Allen Park said it can only follow through with the buyback if it is able to issue refunding bonds backed by a new pledge through the Michigan Finance Authority. It wants to issue roughly $19 million of LTGO bonds backed by a new pledge of state aid through the MFA to raise the cash to pay off bondholders.
Without the refunding, the city won't have the money to tender the bonds, according to documents.
It's the latest twist in a six-year saga. The once-affluent Detroit suburb in 2009 and 2010 issued $31 million of bonds to finance a $146 million film studio at a time when Michigan had the country's most generous film tax-credit program.
But plans for the eight-stage studio soon fizzled after the state reined in the credits and the movie producer in charge of the project left for California. With no one leasing the vast facility, the city was forced to dip repeatedly into its general fund to cover the $2.6 million annual debt service on the project.
By 2012 the state of Michigan declared the city to be in a financial emergency.
In November 2014, the Securities and Exchange Commission charged the city and two former leaders with fraud related to the debt, taking the rare move of charging the public officials as "control persons," and leading to a rare settlement that barred them from ever again participating in municipal finance.
The tender offer was posted Aug. 13. A bond with a 2029 maturity that's rated AA based on the insurance - the only piece of the debt to carry insurance - would be payable at 108% plus interest.
A chunk of the tax-exempt bonds with a 2029 maturity and 5.75% coupon were selling at $91 with a 6.7% yield on Aug. 25, according to EMMA. A piece of the taxable bonds with a 2029 maturity were selling for $91 with an 8.2% yield on Aug. 6. A piece of the insured tax-exempt bonds with a 2030 maturity and 5.5% coupon were selling for $104 and a 4% yield last week.
Bank of America Merrill Lynch is the dealer manager for the tender program. Robert W. Baird & Co. is the city's financial advisor.
The tender offer is subject to change at any time, according to the EMMA documents. The city will decide whether to move forward with the refunding deal after the Sept. 16 tender deadline.
The MFA refunding - which may be a public deal or private placement -- would likely include two tranches of LTGO refunding taxable bonds, one for $14.3 million and one for $4.64 million.
The new bonds would also feature a pledge of the city's distributable state aid with an intercept feature. Under the intercept, the state treasurer would send all of the city's state aid to the bond trustee for the repayment of the city's refunding bonds, and the trustee would then forward any unused state aid to the city.
None of the city's outstanding bonds, including the tender bonds, have a state aid intercept. For that reason, the finance team warns that bondholders who decide to hang onto their original bonds could see deterioration in the bonds' value and liquidity.
The bonds that are not tendered will remain outstanding until maturity, redemption or defeasance.
S&P downgraded the already junk-rated debt further into speculative territory on July 8, saying that it would consider any tender to be a distressed exchange. The ratings agency lowered its rating to CC from B-minus on the 2009 bonds and revised the outlook to negative from positive. It lowered to CCC-plus from B-minus the rating on LTGOs issued in 2002, 2003, 2005 and 2007. The outlook on the LTGOs is stable.
If the new debt carries a state aid pledge and intercept feature, however, S&P could rate the bonds A, according to documents.
