CHICAGO The Michigan Senate Wednesday approved a bill giving bondholders an intercept and statutory lien on Detroit’s income tax-backed bonds in anticipation of the city’s first post-bankruptcy public debt market appearance this spring.
Senate Bill 160 passed by a vote of 36 to 1. It now moves to the House.
The House Committee on Government Operations has taken up the bill.
The legislation applies to $275 million of income tax-backed bonds that the city privately borrowed from Barclays in December 2014 as part of its exit from Chapter 9 bankruptcy.
The bonds, now in a variable-rate mode, are to be resold on the public debt market in a fixed-rate mode within 150 days of the Dec. 10 placement date, unless Barclays grants an extension.
It will be the city’s first appearance in the public market since its Chapter 9 case closed.
The one-day secondary market sale, coming as soon as April, will be similar to a primary offering. Ratings from at least two agencies will be sought, according to the terms of the deal.
The $275 million of bonds are the only case in which Detroit has pledged its income tax revenue to a borrowing.
The measure is aimed at winning an investment-grade rating from at least one major rating agency.
Investors may need more comfort than the two backstops the state legislation would provide given the 10-year life of the bonds, said Howard Cure, director of municipal research for Evercore.
“Ten years for Detroit is a long time,” said Cure. “You really start thinking about the risk of bankruptcy again. I have questions as to what the legal opinions are if the city goes into bankruptcy again.”
Cure said investors should talk to bond counsel or disclosure counsel ahead of the deal to clarify the legal strengths of the state statute.
“The statutory lien is being done through the state Legislature, but federal bankruptcy court can trump that,” he said. “No one is buying Detroit paper without these two mechanisms, but I would have a focus on the strength of the state legislation and what it means if there’s another bankruptcy.”
SB 160 would amend the Home Rule City Act to allow a city with a population of more than 600,000 effectively limiting the bill to Detroit, the state’s largest city to send all its income tax revenue to a trustee for the benefit of the holders of financial recovery bonds, before releasing what’s left over of the money to the city.
SB 160 would also give bondholders a superior, statutory lien on the income tax revenue until the bonds are paid off.
The revenue held in trust would be exempt from being levied upon, taken, sequestered or applied toward paying the debts or liabilities of the city other than those expressly specified in the agreement, a fiscal analysis of the bill says.
The analysis also notes that the lien and intercept could save the city between $2 million and $3 million a year on debt service over the 10-year life of the bonds.
“Bond rating agencies have stated that a statutory lien on the income tax revenue pledged to repay the bonds would improve the bond rating and result in lower interest costs,” Senate fiscal analyst Elizabeth Pratt wrote.
