CHICAGO - Wayne County, Mich. officials say they expect investor interest in an upcoming financing though it will come just days after the county executive requested that the state step in and declare a financial emergency.
"We're still optimistic of a decent rate," said Christa McLellan, Wayne County's deputy treasurer for financial services. "I've been with the treasurer's office for four years and I think we've had a six percent rate in that time, so it would take a lot to shock me. But I don't expect rates to get that high."
She noted that Detroit Public Schools saw a 3.5% rate on a recent note deal that carried SP-2 ratings. Wayne County's delinquent property tax notes carry an SP-1 rating from Standard & Poor's, despite the junk ratings on the county's general obligation debt.
The county originally planned to sell the $186.9 million deal Thursday, but the finance team pushed back the sale after County Executive Warren Evans on Wednesday asked the state to declare a financial emergency. The county now expects to enter the market on June 24 or 25.
A state declaration of financial emergency would be the first step toward a possible state takeover. Evans said he wants to enter into a consent agreement with the state to broaden the government's powers.
Evans' office informed the treasurer's office of the pending announcement a day ahead of note sale, McLellan said.
"They let us know the day before we were going to price that this was coming down the pike so we decided to hold," she said. "They understood that we were in the market and that this might upset or delay things, so they let us know and we weren't caught entirely off guard."
Updated disclosure announcing the county's request for state intervention was to be added to preliminary bond documents by the end of the day Thursday.
Bank of America Merrill Lynch is the underwriter and Public Financial Management is the financial advisor.
The county sells such notes annually to finance payments to the county's local governments to cover their late property tax collections. Wayne traditionally sells the notes competitively and often in a variable-rate mode. This year it decided for the first time in recent memory to go with a negotiated sale and fixed-rate debt, McLellan said.
The decision came after comparing rates of similar credits in competitive versus negotiated deals. The banks played a role in switching to a negotiated sale, she said.
"As the county's financial condition deteriorated and especially because of the talk of bankruptcy, the banks didn't express as much interest as taking on these investments," she said.
"A lot of things have happened since that decision was made, namely the fact that the county has declared a financial emergency," McLellan said.
Despite that, the county plans to stick with a negotiated public sale next week.
The finance team was meeting late Thursday to discuss investor strategy, but McLellan said she did not expect any major structural changes in the deal.
"I think that we have enhanced the security very handsomely at this point," she said. "Nothing has really changed [in the program]."
The notes have a reserve fund with a balance of 10% of par amount. The county treasurer is required to deposit all pledged revenues into a debt retirement trust on a weekly basis. The county also hired special bankruptcy counsel, which opined that note holders would likely be repaid in the event of a bankruptcy. The notes mature on Dec. 1, 2017 with an optional redemption in December 2016 at 100.50%.
Collections have traditionally been strong enough to allow the county to pay off the notes before they mature, according to McLellan.
"The timing of events is no doubt unfortunate, but this is a really good investment," she said. "Our collectability rates are strong and since we've added the call feature we've always exercised it. All the attention detracts from the actual value of this investment."
If the county is unable to access the market to issue the debt, it could hurt some of its local governments. The impact would vary depending on the local unit, McLellan said.
"I've had some say they don't even need to be in the program while some of the others really rely on it," she said. "It depends on the local but I can't say what any of their cash-flow situations is today."
She declined to comment on how Detroit, which accounts for 61% of the county's net receivable tax revenues, might be affected if the county were unable to send all the city's uncollected taxes in one payment. She noted that the county would continue to send the uncollected money to local units on a monthly basis, but it would take longer to remit all the payments.
The county's problems could impact its distressed local units in other ways, one investor said. Howard Cure, director of municipal research at Evercore, noted that Oakland County, an affluent county adjacent to Wayne, was able to help its struggling city of Pontiac while that city was under state control. Among other things, the county took over Pontiac's police force, Cure recalled.
That wasn't the case for Detroit, Wayne County's seat.
"Wayne County has an impact on bondholders as well as for the cities that may have some financial issues," said Cure. "The county can't help, and the state hasn't been that generous with state aid either and they extract a big political penalty," he said. "But Wayne is obviously at the point where they're willing to give up some of their autonomy."
As of Thursday afternoon, the state treasurer had not yet responded to Evans' request, according to treasury spokesman Terry Stanton.
Stanton said the next step would be the treasurer's determination whether and when a preliminary review would be done.
Detroit operated under a consent agreement with Michigan for nearly a year before the state stepped in and appointed an emergency manager, saying the city was not adhering to the terms of the agreement. The emergency manager declared bankruptcy within four months.
But Stanton said that the two governments are not likely to face the same fate.
"There is no intention to follow a similar path where Wayne County is concerned," said Stanton. "The situation faced by the county is far different than that which was faced by the city."
The cities of Inkster, River Rouge and Royal Oak Township currently operate under consent agreements.
