City in Michigan returns to bond market after state-assisted turnaround

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Allen Park, Michigan, officials say its first foray into the bond market after exiting state oversight two years ago was a success.

The city sold $15 million of refunding bonds on Wednesday at pricing levels it expected. The competitive deal was buoyed by a three-notch upgrade to A-plus from BBB-plus by S&P Global Markets that restores the city’s ratings to their pre-emergency management level. The outlook is stable.

"The city is very fortunate to be able to have its credit rating returned to where it was before receivership,” said Robert Cady, Allen Park's finance director.

Brian Lefler, a managing director with Baird, the city’s financial advisor, said the bids received on the bonds were "fair and at market."

Market sources said that the 4% coupon and the fact that these are the first bonds to be issued since the city gained control of its finances may have raised some concerns for some people.

“They are 4% coupon so that changes the pricing on everything because you have to offer more yield with 4% coupon; 5% coupons get more standard pricing,” said one market source. “These bonds are also insured.”

S&P said that the three-notch upgrade reflected the city's continued maintenance of very strong reserves since its release from state oversight in January 2017. The city has $46 million of debt outstanding. Allen Park had fallen into junk territory after struggling to pay bonds for a failed movie studio deal that helped land it under state oversight in 2012 while triggering Securities and Exchange Commission sanctions.

“Without any oversight by state appointed representatives, the city has operated on its own since January 2017 and continued its strong budgetary performance through two budget years while building and maintaining very strong reserves, in our opinion,” S&P said. “In addition, the city has been able to make much needed capital improvements without issuing bonds and putting added debt on its residents by paying with cash on hand and reserves."

The 2019 bonds sold in four series with Hutchinson, Shockey, Erley & Co. winning all four. The purchaser opted to use Build America Mutual insurance for the three series of tax-exempt bonds. The federally taxable bonds were not insured.

A 2024 maturity with a 4% coupon landed at a yield of 2.15%. A 2032 maturity with a 4% coupon landed a yield of 3.00%. A 2034 maturity with a 4% coupon landed a yield of 3.12%.

The proceeds for the transaction will be used to refund UTGOs and LTGOs for interest cost savings only.

Cady said that the competitive sale process “seemed to be the best option” for Allen Park.

In addition to the bond debt, Allen Park also faced a chronic general fund deficit, severe cash-flow problems and political infighting.

In November 2014 the SEC charged the city, former Mayor Gary Burtka, and former city administrator Eric Waidelich with fraud in connection with the original $31 million bond deal to finance a movie studio project. The SEC found that offering documents provided to investors during the city's sales of the GO bonds contained false and misleading statements about the scope and viability of the movie studio project, as well as Allen Park's overall financial condition and its ability to pay debt service.

The city was under some form of state oversight from October 2012 until its release in January 2017.

It was placed under emergency management in October 2012 until October 2014. The Receivership Transition Advisory Board was appointed in October 2014 when the financial emergency was resolved to oversee the city's transition back to local control.

Under state control, Allen Park accomplished an increase in the amount of the city's general fund balance. The city passed a 10-year public safety millage and a 10-year road millage in November 2015.

The city has also made all required contributions into the pension and retiree healthcare systems, including an additional $500,000 annual payment toward other post-employment benefit liabilities.

S&P has upgraded the city twice since its exit from state oversight: once in June 2018 the city was upgraded to BBB-plus from BB and also in March 2017 it was upgraded to BB from CCC-plus.

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Primary bond market Ratings Michigan