CHICAGO – With all governmental approvals and ratings in hand, Detroit expects to return to the market in the coming days or early August with its first post-Chapter 9 general obligation state distributive aid backed borrowing.
More than $600 million of refunding bonds will sell in four series through the Michigan Finance Authority with Barclays running the books.
Moody's Investors Service and S&P Global Ratings affirmed the single-A to double-A ratings on Detroit bonds backed by distributable state aid, or DSA, and sold under the MFA's local government loan program. The range of ratings is due to individual series' lien status.
The city's general obligation ratings remain deep in junk.
"Given the double-barrel pledge, we rate the bonds to the stronger of the two pledges, which is the DSA revenue stream," S&P said.
"While we were always hopeful and had the expectation that the rating would be affirmed, we were pleased to see the rating agencies affirm them," the city's finance director, John Naglick, said Friday.
The release of ratings late Thursday followed the MFA and state Treasury's approval, allowing the city to go to print with its offering statement, which was expected to be distributed later Friday. "That was the last hurdle," Naglick said.
The finance team has not settled on what additional investor outreach it might undertake and was still deciding Friday whether to price the bonds in the final days of July or the following week.
The pricing will come after Detroit Mayor Mike Duggan's Wednesday speech at the Democratic National Convention in Philadelphia.
The city anticipates about $40 million in savings from the traditional economical refunding due to record low prevailing rates, even with the anticipated yield penalties the city will face for its fiscal recovery risks and lingering market resentment stemming from its bankruptcy.
Detroit is also forgoing a tax-exempt structure on three series based on tax code rules governing the refunding of working capital bonds.
Market perception of Detroit was tainted by its poor treatment of bondholders as it shed $7 billion of debt to emerge from Chapter 9 in late 2014. Pension burdens remain a strain challenging the city's recovery.
The city will resume regular pension payments in 2024 with an estimated payment of $115 million, plus actuarial adjustments for changing mortality rates, which could mean up to an additional $85 million per year, rating agencies said.
Naglick said he didn't want to comment on the size of the city's yield penalty.
"The market will determine where the bonds will price," he said. "We see this as an opportunity to go back into the market to show Detroit's progress and provide an update" on financial information from 2015 financial results that show a balanced budget and fund balance.
In August 2015, in its first post-bankruptcy bond sale, the city sold $245 million of local government loan program revenue bonds through the MFA. 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.
The city paid tax-exempt yields that landed 194 basis points over the Municipal Market Data's top-rated benchmark and 133 basis points over an A-level credit. The $110.28 million taxable series was priced about 300 basis points above the comparable Treasury security.
The city continues to spend down proceeds from its exit financing and has no new money borrowing plans.
Savings from the refunding will provide budget and property tax relief. JPMorgan, Bank of America Merrill Lynch, Loop Capital Markets and Siebert Brandford & Shank will round out the underwriting syndicate. First Southwest is advisor on the transaction and Miller Canfield Plc and Dickinson Wright Pllc are legal advisors.
Moody's affirmed the Aa2 rating for what it expects to be a $247 million taxable first lien C-1 series, the A1 rating for the $125 million taxable third lien C-2 series, and the A2 rating that applies to the $229 million tax-exempt fourth lien C-3 series as well as the taxable $20 million fourth lien C-4 series.
The rating agency assigned an Aa3 to $96 million of outstanding second lien debt, which is not part of the refunding. Detroit carries a B2 issuer credit rating and stable outlook from Moody's.
The bonds are formally called Local Government Loan Program Revenue Bonds, city of Detroit distributable state aid bonds.
S&P affirmed and assigned to the new deal the AA rating it assigns to the first lien, its A-plus rating for the third lien and A-minus rating on the fourth lien. It affirmed the AA-minus rating that applies to the second lien and the city's B GO rating. The outlook is stable.
First and third lien bonds carry a limited tax pledge and second and fourth lien carries an ULTGO pledge. The deal adds $35 million to the fourth lien.
The city's distributable state aid includes a portion of the 6% retail sales tax revenues collected across the state. The pledged revenues are divided into constitutional and statutory pieces. Constitutional state aid is distributed based on population while statutory aid is distributed based on a formula the state determines. Debt service coverage ranges from 2.4 times to 10 times depending on the lien.
The bond structure features a statutory lien on DSA, a requirement that the state treasurer send all aid needed for debt service directly to the trustee, and a pledge that set aside revenue won't be withheld if state aid payments are delayed.
Credit strains include the lower coverage level on the fourth lien and the sensitivity of state aid to city and state economic conditions. Constitutional distribution of state aid is based on Detroit's population and the total amount of state aid available for distribution is based on statewide sales tax collections.
"The ratings on the distributable state aid bonds reflect our view of the continued strong DSA revenue stream based on the broad statewide collection area for revenues," said S&P analyst Jane Ridley.
"The stable outlook is based on the stable outlook assigned to the state of Michigan's credit rating and also incorporates the expectation that debt service coverage across all liens will remain sound even if pledged state aid declines significantly," Moody's said.
The city has stabilized its operations but is still challenged to demonstrate and maintain structural balance, analysts said, keeping its underlying ratings low.
"If Detroit demonstrated improvement in financial performance and execution, we view an upgrade of the GO bonds over the one-year horizon of the outlook as possible, but given the challenges still facing the city, think that likelihood is less than one-in-three," S&P said.