CHICAGO — Detroit Public Schools today is expected to price roughly $325 million of federal stimulus bonds that will finance a capital campaign that city leaders hope will help rebuild both the struggling district's buildings and its reputation.
The sale comes with DPS under control of an emergency financial manager appointed by Michigan Gov. Jennifer Granholm in January. School administrative veteran Robert Bobb has crafted a plan to address chronic and substantial operating deficits while also revamping the system by closing nearly 30 schools, restructuring 40 others, and launching a $1.2 billion capital plan that is partly financed with the proceeds of this week's bond sale.
Voters in November approved the district's request to borrow up to $500 million. It is expected to enter the market in the spring to sell the remaining $123 million.
The debt is enhanced by the support of the state's school bond qualification and loan program, which pledges that Michican will step in to make payments on the debt if DPS is unable to.
With the state enhancement, Moody's Investors Service assigned an Aa3 rating to the bonds with a negative outlook. Standard & Poor's rates the bonds AA-minus.
The district today expects to price around $200 million of school building and site bonds that include taxable general obligation Build America Bonds and tax-exempt GO debt, along with about $123 million of GO qualified school construction bonds.
JPMorgan and Siebert Brandford Shank & Co. are leading a team of underwriters that includes Loop Capital Markets LLC, Citi, and PNC Capital Markets LLC. Miller, Canfield, Paddock and Stone PLC and Lewis & Munday are co-bond counsel. Public Financial Management is serving as financial adviser on the deal.
After taking over earlier this year, Bobb warned that Chapter 9 bankruptcy protection was a possibility. As DPS would be the first large public school district to file for bankruptcy, it is unclear how the move would affect bondholders.
Preliminary bond documents for this week's sale note outline for investors the possible impact of bankruptcy, saying it's likely a court would declare money that is set aside for debt payments as "special revenue," which would help ensure continued payments on the debt.
"If the district were to go into bankruptcy, the district has been advised by counsel that, although the question is not free from doubt, in a case that is properly argued, the court having jurisdiction over the case should hold that the proceeds of the taxes that are levied by the district for the specific purpose of paying the principal of and interest on the bonds constitute 'special revenues,' " according to bond documents.
The designation would likely mean that the revenues would not be subject to an automatic stay and that the district could continue to use the money to make debt service payments after bankruptcy.
But if a court decided that the taxes are not special revenues, "there could be substantial delays or reductions in payments on the bonds," the documents warn. "In addition the holders of the bonds may need to obtain the permission of the bankruptcy court before any payments can be made on the bonds."
Moody's negative outlook on the debt is based in part on the possibility that the district would file for bankruptcy and the uncertainty of how the move would affect the district's debt obligations.
However, the agency's Aa3 rating takes into account the strength of the state's school loan program, which requires that the school district transfer the debt service payment to a paying agent five business days prior to the due date.
If a payment is not made, the Michigan Department of Treasury is notified and is required to make a loan from the state's school loan revolving fund to ensure timely payment.