CHICAGO — Detroit officials say early feedback from large institutional investors signals that the tender offer for its water and sewer bonds will be a success.
The tender is part of the bankrupt city's proposal to restructure up to $5.5 billion of Detroit Water and Sewerage Department bonds to achieve savings. The offer, if widely accepted, would help resolve a months-long stalemate with water and sewer bondholders and advance the city's efforts to exit bankruptcy.
The city says it will only go ahead with the refunding if enough bondholders agree to tender their bonds, for prices that are both above and below par, depending on various factors.
If Detroit refinances the debt in a public offering, the finance team said interest rates would likely be at 5.75% or lower, even for uninsured bonds, according to
Assured Guaranty has agreed to wrap at least some of the new bonds, which would feature a senior lien on the department's revenues.
The city asked Bankruptcy Judge Steven Rhodes to approve the financings, which include the tender offer, a refunding of the tendered debt, a refunding of currently callable debt, and $190 million of new money bonds.
Without the financing, and especially the $190 million new money piece, the department's capital budget "will be perilously depleted beginning in October 2014," risking non-compliance with federal environmental standards, the city warned.
The documents give the first glimpse of settlement details reached with holders of the water and sewer bonds.
The city reached the settlement after mediation with insurers Assured, Berkshire Hathaway Assurance Corp., Financial Guaranty Insurance Co. and National Public Finance Guarantee, as well as an ad hoc committee of water and sewer bondholders that includes Blackrock Financial Management Inc., Eaton Vance Management, Fidelity Management & Research Co., Franklin Advisors Inc., and Nuveen Asset Management, plus trustee US Bank NA.
"Based on preliminary feedback from certain large institutional holders of existing DWSD bonds, the city is informed and, therefore, believes that there is sufficient interest in the tender among bondholders to achieve a successful result," the city said in the court documents. "To the extent consummated, the tender would facilitate a consensual restructuring of DWSD's capital structure, while rendering unimpaired all existing DWSD bond claims and resolving the DWSD bond objections to confirmation of the plan."
The settlement calls for each member of the ad hoc committee to tender a "significant portion" of their respective impaired DWSD bonds. The city would issue the new bonds either through a public offering, direct purchase or a private placement. The city has requested that the court find the pledge of DWSD net revenues constitute a lien on "special revenues," and said it would file an amended debt plan treating the existing DWSD bonds as unimpaired.
After the bondholders are paid with proceeds from the refinancing, they would be required to approve the city's confirmation plan.
The bondholders also agreed that the DWSD can pay $24 million annually to the city's general employee pension fund as part of its operation and management expenses. The payment will come from a pension liability payment fund that will be funded after payments are made into the state revolving fund junior-lien bond and interest redemption fund, according to the documents.
Detroit launched the tender period on Aug. 7 after months of stalemate with bondholders, who weren't willing to accept impairments Detroit had proposed for the water and sewer revenue debt, which, despite the city's bankruptcy, is backed by a solvent enterprise.
The tender offer will end Aug. 21.
Detroit will decide by Aug. 22 whether to tender the bonds, and asked the court to schedule a hearing on the motion on Aug. 25. If the motion is granted, the bonds would go to market on or around Aug. 26, with a close scheduled for Sept. 4.
The city also agreed to reimburse the fees and expenses of some of the parties, including $3 million for Assured, $1.2 million for the ad hoc committee, and $550,000 to FGIC. It has not yet resolved the fee payment claims of National, and Berkshire is not asserting a fee.
A refinancing would also let the city tap debt service reserve funds for current bonds that hold as much as $50 million, which it would use to reduce the size of the upcoming refunding.
If it's a public deal, Citi will be the lead underwriter. Its fees will be 0.1% of the principal amount of the tendered bonds and a 0.3% to 0.4% of the refunding and new-money issue amount.
"Citi's proposed underwriter's discount is well below market averages for public offerings of municipal bonds on both an insured and uninsured basis based upon data compiled by Securities Data Corporation," the city said in the documents.
First Southwest Co., financial advisor to both the DWSD and the Michigan Finance Authority, is charging $395,000 tied to the tender program and $590,000 for the refunding and new-money issue. The firm will also be reimbursed $93,000 for expenses. The finance authority would be conduit issuer of new bonds.
The total fixed costs of fees and expenses the city expects to incur for the tender is $2.44 million and $3.75 million for the refunding.
Current bond agreements allow the department to issue additional parity debt as long as it meets an additional bonds test. The city said it would not go ahead with the financing if the additional bonds test or a debt-service savings test is not met.
