'Robust' Investor Interest Seen in Detroit Lighting Bonds

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CHICAGO - Detroit's Public Lighting Authority, which priced $185 million of bonds Wednesday through the Michigan Finance Authority, escaped punishment from investors despite Detroit's tainted name as yields fell generally in line with other triple-B rated credits.

Standard & Poor's rated the debt A-minus and Fitch rated it BBB-plus.

"As anticipated, investors did their homework and demonstrated an appreciation for the credit strength of our deal," Odis Jones, Chief Executive Officer of the PLA, said in a statement.

Bonds maturing in 2019 with a 5% coupon yielded 2.08%, compared to 2.25% for other triple-B rated credits and 1.26% for triple-A rated credits, according to Municipal Market Data.

Bonds maturing in 2022 with a 5% coupon yielded 3.13%, again roughly in line with other triple-B credits.

Obligations maturing in 2030 with 5% coupon yielded 4.11% and bonds maturing in 2039 with 5% coupon yielded 4.55%.

Debt with the final maturity of 2044 and a 5% coupon yielded 4.6%. That compares with 4.48% for triple-B rated credits and 3.36% for triple-A credits, according to the MMD.

The debt features an optional call at par in 2024.

The deal was 2.5 times oversubscribed and 35 institutions and "several dozen" individual retail accounts placed orders for the bids, according to the Michigan Department of Treasury, which said investor interest in the deal was "robust."

The interest cost totaled 4.53% over the life of the bonds, the state said.

"This project has been a priority for the state, and the MFA was proud to have assisted the PLA to reach its financing goals," Joseph Fielek, director of the MFA, said in a statement. "It was important to us to find a long-term solution at a low cost, and we have achieved those objectives. It highlights the ability of communities to finance essential projects during financially challenging times if a bond issuance is well structured."

Gov. Rick Snyder said the lighting repairs shows how the city is continuing to improve. The deal marked the first time an entity with the Detroit name and backed by city taxes entered the market since the Motor City filed for the largest municipal bankruptcy in the U.S. last July.

To assuage investors rattled by Detroit's default on much of its bond debt, the finance team built various legal protections into the public lighting deal. Protections include a so-called intercept feature that calls for the utilities to send the tax revenue directly to the bond trustee, a legal opinion from the deal's bond counsel that the bonds would be "bankruptcy remote," and a ruling from U.S. Bankruptcy Judge Steven Rhodes, who oversees Detroit's case, that affirms the lighting authority is a separate entity from Detroit and the city cannot claim the pledged portion of the utility tax revenue in the future.

A utility user tax -- a 5% tax tacked on all utility bills in the city, including telephone, gas, and electric -- backs the bonds.

Ahead of the sale, investors predicted the bonds would attract buyers hungry for yield in the current market.

Citi was senior manager on the transaction and BMO and Loop Capital were co-managers. Dickinson Wright was bond counsel to the MFA and Miller Canfield bond counsel to the PLA. Robert W. Baird & Co. was financial advisor.

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