CHICAGO — Shut out of the public market by its junk-bond ratings and fiscal problems, cash-strapped Detroit on Thursday closed an $80 million private placement that pushes off a debt-service payment less than two weeks away.
The deal is a short-term financing that allows the city to delay $37 million of debt payments coming due April 1 and May 1 for another 90 days.
Detroit will pay an interest rate of 2.97% on the debt, which was privately placed with Bank of America-Merrill Lynch.
The notes feature a June 27 mandatory tender, according to a state treasury official who asked to remain anonymous.
The Michigan Finance Authority acted as conduit on the deal and will return to market soon to issue new bonds to pay off the privately placed debt.
If the bonds are not paid off by June 27, the city will have to pay a higher rate that is pegged to a floating-rate index.
Detroit’s state revenue sharing payments, which are paid every other month, back the bonds.
The $80 million issue includes $43 million of new-money self-insurance bonds and $37 million of refunding limited-tax general obligation bonds.
The city typically pays self-insurance claims out of its general fund, so the new-money borrowing will free up dollars in its general fund.
The $37 million of refunding bonds will cover debt-service payments due April 1 and May 1.
The MFA plans to come to market over the next few months to issue $137 million of bonds that will be used in part to pay off the private placement.
The remaining $57 million will be issued as new-money self-insurance bonds.
The state official was not sure if the city plans to disclose information on the privately placed deal on the Municipal Securities Rulemaking Board web site.
The state has been working on the deal for months. The Detroit City Council last week briefly delayed it because the city’s use of the proceeds was contingent on signing a consent decree with the state.
That provision was removed, the state official said.
Proceeds, however, will be held in escrow and can be released only with the state treasurer’s approval, though the refunding proceeds have already been sent to the bond trustee.
Meanwhile, the city council is expected to vote Monday on the state’s newest consent decree, which would preserve most local power but require the city to nullify recently negotiated union contracts.
Council members reviewed the 45-page proposal last Thursday and agreed to meet again Monday.
Gov. Rick Snyder has said he wants the a final agreement in place by April 5 to avoid having to appoint an emergency manager to take over the troubled city.
The latest proposal under consideration requires the city to not approve recently negotiated union contracts — contracts that city officials touted as “historic” for the size of union concessions — and allow the current ones to expire this summer. It calls for new agreements to be in place by July 16 with deeper cuts and authority to outsource and consolidate to save money, and for all new employees to have a defined contribution retirement benefit, like a 401(k) plan.
The state team reviewing the city’s finances released a report last week saying the city overstated the savings of the new union contracts.
The state plan creates a nine-member fiscal advisory board whose members would be named by Detroit Mayor Dave Bing, the city council, and Snyder. It calls for a the appointment of a so-called project manager as well as a chief financial officer.
The city would have to create three-year spending plans as opposed to one-year budgets. The mayor would still propose the budget but the state treasurer would have final say.
The proposal calls for Detroit to eliminate its deficit within five years, and allows for the appointment of an emergency manager if the city fails to fulfill certain targets.
