CHICAGO — Detroit's finance director had no complaints Thursday about the steep premium the city paid to access the municipal market for the first time since exiting Chapter 9.
"We are very pleased with the results," John Naglick said of the Motor City's $245 million sale of local government loan program revenue bonds on Wednesday.
The bonds sold through the Michigan Finance Authority, led by Barclays.
The $134.73 million tax-exempt series of Detroit financial recovery income tax revenue and refunding local project bonds were priced with yields ranging from 3.40% in 2020 to 4.50% in 2029. The yield on the deal's longest tax-exempt maturity landed 194 basis points over the Municipal Market Data's top-rated benchmark and 133 basis points over an A- level credit.
The debt was enhanced with a statutory lien and intercept feature on the city's income taxes, which landed the deal an A rating from Standard & Poor's, which rates Detroit itself deep in speculative-grade territory.
The $110.28 million taxable series was priced at par to yield 4.60%, or about 300 basis points above the comparable Treasury security.
Naglick said the finance team calculated the average weighted interest at 4.44%, an improvement over the 5.75% rate assumed in the plan of adjustment that paved the way for the city's Chapter 9 exit late last year.
The pricing followed an investor meeting attended by key city finance officers, Mayor Michael Duggan, and the lead banker and city bond counsel representatives in New York City late last Thursday that was then posted as a roadshow with the preliminary offering statement.
One-on-one meetings with about 10 individual funds followed on Friday and Monday, Naglick said. The meetings were held with well-known fund names "you'd expect to look" at this type of transaction, he added.
"The meetings helped us get a sense of how they were looking at the" credit, he added. "They really dug into it."
The tax-exempt tranche was oversubscribed, allowing the city to lower yields as much as 25 basis points on its longest maturity. Naglick declined to provide additional information on the number of orders or price changes on various maturities.
Naglick said investors quizzed the finance team on both the structural guarantees behind the bonds, which were designed to quell investor concerns over their treatment should the city land back in bankruptcy court, and also on the city's progress in stabilizing its finances. The city remains under the purview of a financial review commission with a big say on any financial moves.
"They wanted to make sure they understood" the structural protections but "equally they wanted to know we were performing against the plan of adjustment," Naglick said.
The new state-approved pledge giving bondholders a superior, statutory lien on income tax revenue marks a for any Michigan borrower. The law also exempts the revenue held in trust from being levied upon, sequestered or applied toward any other debts.
Naglick said the structure came together as the city earlier this year focused on the deal and how best to get it executed in a way that assured market interest.
Detroit's bond counsel, Miller Canfield Paddock & Stone PLC, offered a "reasoned opinion" the establishment of the trust ensures that the revenues would not be considered part of the debtor's estate.
The safeguards drew the investment-grade rating and buyer interest, but only went so far in offsetting market skepticism over the city's fiscal wherewithal.
Bond documents make clear, also, that there's no guarantee those protections will hold up.
"The bankruptcy court would not be bound by legal opinions other than binding precedent, and there currently is no binding precedent regarding these matters," the documents say. "Thus, the opinion of bond counsel to the city is not (and cannot be) a guaranty that the pledged income tax revenues would be treated as subject to a statutory trust or lien."
Proceeds from the deal will largely be used to repay Barclays for a $275 million loan that financed the bankruptcy exit.
"The structure is built to survive bankruptcy but it makes sense for bondholders to be careful," said Municipal Market Analytics partner Matt Fabian. "Detroit is still a terrible name in the market. I think the market is slowly appreciating the risk in credits like Detroit, where structure in important but it's not everything and even the best structural protections are at risk of dissolving."
