CHICAGO — A post-bankrupt Detroit will have no problem selling itself as a new and improved credit to a bond market eager for yield, the city's investment banker testified in federal court Tuesday.
Ken Buckfire, of New York-based Miller Buckfire, said he's confident Detroit will be more attractive to investors than many other issuers once it emerges from the largest U.S. municipal bankruptcy.
"I will actually argue that the credit of Detroit will actually be better than the credit of other major cities that have not dealt with their" pension and health care liabilities, Buckfire said, according to local reports from the courtroom. He testified before US Bankruptcy Judge Steven Rhodes during a trial on the city's plan of confirmation.
"The market, I believe, is now re-accepting Detroit's credit," Buckfire said, estimating the city would be able to borrow at an interest rate of around 5% as early as November.
Even after its controversial decision to default on all its debt payments and an ongoing effort to repudiate $1.5 billion of certificates of participation, Detroit is likely to return to the markets within the year as a "normal borrower," Buckfire told Rhodes.
"The city, if it successfully exits bankruptcy, will be able to access capital in the normal course," he said.
That's partly because the muni market is hungry for yield and would "welcome" Detroit's bonds, he said. The state-controlled oversight board and the city's future tax stability will also be selling points to investors in the "New Detroit," he said.
"Tax revenue stability will be the most crucial element of the credit story," he said.
The oversight board will reassure investors, Buckfire said. "That's another element of the credit post-bankruptcy that will give the market a lot of confidence that the city will be able to repay when due."
The city will also engage in a "major re-education of the credit rating agencies" to try to boost its junk-level ratings. "It's certainly not a distressed situation any longer," he said.
The city will shed $7.3 billion of debt in the Chapter 9, slicing its debts to $3.1 billion from $10.4 billion, according to Buckfire.
The banker also provided an overview of a $325 million exit financing that will be privately placed with Barclays for 150 days before being sold publicly. The 150-day period will give the city time to sell the story of the new and improved credit.
The bonds will be a backed by a senior lien on income tax revenue. Rhodes questioned Buckfire about whether the city would be able to enter the markets with so-called unsecured, or general obligation bonds, without an income-tax pledge.
The banker said it could, but it would cost the city between $500,000 and $1.13 million annually.
In trying to secure exit financing, Miller Buckfire contacted 19 or 20 institutions, he testified. Ten of them sent proposals to the city, including Barclays, Morgan Stanley, Goldman Sachs, JPMorgan, and Bank of America-Merrill Lynch. Buckfire said he then whittled the final list down to Barclays, Morgan Stanley, and Jefferies.
The trial resumed Tuesday while reports circulated that the last major holdout creditor, Financial Guaranty Insurance Co. was nearing a settlement with the city. That would remove the last obstacle to a drawn-out trial or post-trial appeal of the confirmation plan.
Detroit businessman Dan Gilbert is expected to take the stand Wednesday, followed by emergency manager Kevyn Orr. Mayor Mike Duggan and City Council President Brenda Jones are set to testify Monday.
