CHICAGO — Detroit's new public lighting authority has received an A-minus rating from Standard & Poor's as it gears up for its first public bond sale.
The Michigan Finance Authority will issue the debt on behalf of the lighting authority. It's expected to total $185 million and be sold in late June with a July 1 closing. Citi is the senior manager. Robert W. Baird & Co. is financial advisor and Miller Canfield LLP is bond counsel.
It will mark the first public offering by the lighting authority, created by the Michigan Legislature in 2012 prior to Detroit filing for the largest municipal bankruptcy in the U.S. The authority was created to solve one of the city's most vexing problems, a lighting department so broken down that up to half of the city's streetlights were reportedly dark last year.
"The sale of these bonds will mean that we will be able to continue uninterrupted our work to restore reliable street lights to the city during the next two years," PLA CEO Odis Jones said in a statement. "It also means 15,000 more lights for residents, bringing our total number of lights to 64,500 LED's. We're excited to be able to install more lights than we originally planned."
The MFA in December 2013 privately placed $60 million of short-term, floating-rate bonds on behalf of the lighting authority with Citibank NA. The new deal will roll over that debt into long-term bonds, with the rest as new-money debt.
S&P assigned a stable outlook to the bonds, which are structured as Michigan Finance Authority local government loan program bonds.
The bonds are secured by a 5% utility users tax levied by Detroit on gas, electric and telephone. The deal includes an intercept feature that pledges the entire tax collection to the bond trustee, which will set aside debt service and send the rest to the city.
The maximum annual pledge for debt payments is $12.5 million. That should translate into debt-service coverage of 2.97 times based on 2013 collections, according to S&P. The utility users tax totals roughly $40 million a year.
The rating reflects the security of the utility user tax backing the debt as well as other bondholder protections, S&P said. The protections offset the potential bankruptcy risk the ratings firm considers when rating debt associated with a municipality in Chapter 9, the firm said.
"Under the structure of the bonds, the utility users tax held by the trustee in favor of bondholders is to be used for the sole purpose of making debt service payments, and we view this as a key credit strength," S&P analyst Jane Ridley said in a statement.
Analysts also said that opinion from bond counsel provides "legal comfort" that, should the lighting authority become a debtor under the bankruptcy code, a court would not likely find the utility users tax revenue to be property of the authority and would likely find it to be special revenues.
As well, Detroit's current bankruptcy court has issued an order that authorizes the city to enter into the financing and transfer the tax to the bond trustee.
"During the past year, we believe Detroit has shown a lack of commitment to honor its obligations on time and in full when an otherwise-available revenue stream was pledged, such as the tax revenues collected for its unlimited tax GO bonds," Ridley wrote in the ratings report. But the PLA deal is structured so that the city does not have control of the utility users tax until after debt service is paid, and that sending the revenue to the trustee is "irrevocable" as long as any debt is outstanding.
"In this manner, the legal protections on these bonds are similar to the protections on Detroit's Distributable State Aid bonds," which are rated investment grade and have been treated as secured special revenues bonds by the city and the bankruptcy court, S&P said.
No other ratings have yet been released on the bonds.
