Detroit cements redemption of $54 million of bankruptcy case debt
CHICAGO – Detroit formally moved to pay off $54 million of its 2014 financial recovery bonds issued as part of its Chapter 9 exit plan, a move city officials billed as another sign of its improved fiscal health.
The city had previously announced plans to use surplus cash on hand to fully defease the C series of bonds that carry a final 2026 maturity. Its oversight body, the Detroit Financial Review Commission, and the Detroit City Council recently approved the expenditure.
The city issued a 30-day redemption notice on Wednesday and said it had fully funded an escrow to retire $52.3 million of remaining principal and $2.1 million of accrued interest to fully redeem the 2014C bonds effective April 13. The move will generate $11.7 million in interest savings.
"The mayor and city council have again shown their commitment to the city's long-term financial sustainability by taking action to authorize the resolution for the redemption of all of the outstanding principal on the city’s Financial Recovery Bonds, Series 2014C,” Detroit chief financial officer John Hill said in a statement.
The C series of unrated, taxable bonds totaled $88.4 million and paid 5% interest. They are secured by the city’s limited tax general obligation pledge and payable from city parking revenues. They were scheduled to mature from 2015 through 2027.
About $54 million remains outstanding after early maturities amortized and the $15 million sale of a parking garage triggered a mandatory redemption, said Detroit's chief deputy CFO and finance director, John Naglick.
The C series was part of $1.28 billion of borrowing the city closed on in December 2014 to fund creditor settlements and raise funds for revitalization efforts, paving the way for its exit from Chapter 9, during which it shed $7 billion of its $18 billion of debt and obligations.
The city remains on course to exit direct state oversight as soon as this spring. Mayor Mike Duggan recently unveiled a $2 billion balanced budget and once it passes the city can make its case to get out from active state oversight.
“I expect in April or May we’re going to see the Financial Review Commission vote to end oversight and return self-determination to the city of Detroit,” he said.
As part of Detroit’s approved plan of debt adjustment, Michigan mandated the appointment of the commission to oversee the Motor City’s finances, including budgets, contracts, and collective bargaining agreements with municipal employees. The commission would go into a dormant period and if red ink returns it would be re-activated.
The city’s general fund — budgeted at $1 billion — continues to do well because income tax revenues are increasing, Duggan said. The budget maintains more than a 5% reserve that is projected at $62.3 million.
The city also continues to put aside money to deal with higher-than-expected pension payments starting in 2024 when annual payments of at least $143 million begin. Payments of $20 million run through 2019 with no payments then due through 2023.
Detroit’s bond ratings, though still deep in junk territory, were upgraded last year. On Dec. 21, S&P Global Ratings upgraded the city’s issuer credit rating to B-plus. The outlook is stable. Moody’s Investors Service upgraded Detroit to B1 from B2 in October.