Detroit issues RFP as it pursues refinancing of financial recovery bonds

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DALLAS – Detroit has launched a request for proposals to find banks to lead a tender offer and refunding of its financial recovery bonds with the aim of lowering its costs and easing a future escalation of debt service.

The city issued the RFP Wednesday and the deadline for interested parties to submit their proposals to the city is Oct. 27. The city issued $631 million of unsecured B1 and B2 notes and $88 million of unsecured C notes that were distributed to a limited number of parties as part of the implementation of its plan of adjustment to exit Chapter 9 bankruptcy. The city filed for municipal bankruptcy in July 2013 and exited in December 2014.

“The city is interested in engaging a bank/investment bank to pursue the tender for or other acquisition of the B Notes and/or C Notes for the purpose of repurchasing or refunding (or some combination of purchase and refunding) those securities to achieve interest rate savings, principal amortization restructuring, and other potential benefits,” the city’s RFP stated.

The city expects the replacement bonds will “require security in addition to the limited tax general obligation pledge securing the B Notes and C Notes to achieve the goals described above, and responding firms should specifically address how the security of the refunding bonds could best be improved,” the RFP reads.

The city is open to “alternative financing structures or approaches” from the responding firms “that increase the overall potential benefits.”

The city is looking to refinance the bonds before the B notes begin amortizing principal. The $632 million of LTGOs that are unsecured were used to pay off various creditors. Issued as term bonds, the debt has a 30-year maturity, and bears interest at 4% for the first 20 years and 6% for the last 10 years. Payments are interest-only for the first 10 years and start amortizing principal in year 11.

“It is the city’s goal to alleviate the significant escalation of debt service during the period when principal on the B Notes begins to amortize, and that any transaction resulting from this RFP process be executed as early as possible in the first quarter of 2018,” the RFP says.

Miller Canfield is bond counsel and First Southwest Co., a Division of Hilltop Securities, is financial advisor.

The city is looking for firms with specific experience in designing and executing a successful bond tender program or other plan for the acquisition of municipal securities, a demonstrated capability to structure, market and sell bonds issued by municipal governments with less than investment grade underlying issuer ratings, and a demonstrated ability and willingness to use the firm’s balance sheet on an interim basis to achieve the goals of the project, and an appropriate level of experience working with state and local government financings in Michigan.

The C notes are an unsecured note of the city as well but the bonds are structured with a trap of the city’s parking revenues and mature in 2027. “Those bonds are traded very close to par because people view them as very secure,” said John Naglick, Detroit finance director. “Those bondholders feel really comfortable because they see the intercept doing what it was designed to do.”

Since exiting bankruptcy Detroit has tapped the public bond market twice: in August 2015 with $245 million of local government loan program revenue bonds and in August 2016 with a $615 million general obligation/distributable state aid backed bond sale. Both deals were issued through the Michigan Finance Authority. The 2015 debt was enhanced with a statutory lien and intercept feature on the city's income taxes, which landed an A rating from S&P Global Ratings.

Last week the city announced plans to privately place $125 million of bonds. The bonds will be issued through the Michigan Finance authority and privately placed with JPMorgan in November, pending approval of the city council and the Detroit Financial Review commission, The bonds will be secured by increased revenues the city is receiving from its share of state gas taxes and vehicle registration fees that have not been included in its current road improvement plan.

The city’s GOs are currently rated ‘B’ with a stable outlook from S&P Global Ratings and ‘B2’ with a stable outlook from Moody’s Investors Service.

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Sell side Refunding bonds Budgets City of Detroit, Michigan