Detroit plans stand-alone bond market return for December
Detroit is planning its return to the market by year’s end with a $112 million issue that would mark its first stand-alone borrowing since its historic 2013 Chapter 9 bankruptcy filing.
The city council has authorized a total of $255 million in tax-exempt bonds over the next five years to finance capital projects. It plans to issue $112 million of new money unlimited tax general obligation bonds by December and the remaining bonds will be issued in 2021.
The December deal would be the city's first since 2010 without some form of state support.
“We are not enhancing that borrowing; it will be on the city’s credit,” said John Hill, Detroit's chief financial officer. “We think it is important for the city to get back into the market on its own credit.” Hill plans to leave the city government in December.
That credit remains junk-rated, though Detroit has improved its fiscal standing a bit since emerging from bankruptcy in late 2014 after shedding a significant portion of its liabilities, in part by cramming down its bondholders.
In May, Moody’s Investors Service upgraded the city’s issuer rating to Ba3 from B1. It assigns a stable outlook. In December, S&P Global Ratings upgraded the city’s issuer credit rating to B-plus. The outlook is stable.
Detroit's voters authorized the $250 million of borrowing more than a decade ago. It will be used to fund capital projects outlined in the city’s capital agenda.
Goldman Sachs is the lead manager. Citi and Siebert Cisneros Shank & Co are the co-managers.
Hill said that the city is working on its investor push and officials will go to Chicago and Boston to market the bonds. Hill said the city is prepared to pay 5.5% to 6% on the bonds.
“Detroit probably should be issuing bonds given the current market context,” said Municipal Market Analytics Managing Director, Lisa Washburn. “I suspect that the bonds will be well-received by investors notwithstanding their abysmal treatment in the city's bankruptcy. Buyers should probably consider that history when making their investment decision. But, market participants are likely to worry about the future later.”
Howard Cure, director of municipal bond research at Evercore Wealth Management, said Detroit shouldn’t have to pay an exorbitant interest penalty.
“I still think that since rates are still relatively low, there will be enough interest from investors to make this a successful deal,” he said. If rates continue to rise, the city’s advantage could diminish, he said.
Long-term credit risks linger for Detroit in the form of weak demographics, questions about its ability to sustain economic growth, a coming pension funding increase, and concerns that the state may cause problems for the city, Washburn said.
“An investor is essentially making a bet that the strong financial policies implemented by the city will remain in place even under a new administration,” said Cure. “Also, that the city addresses their underfunded pensions and continues to grow economically. Based on the current trajectory, I think the bet is that the city could eventually return to investment-grade ratings. That is in no way assured.”
Hill said that it is possible the city would also look to do a refunding on some of the city's limited tax general obligation bonds by the end of the year.
“We are not sure what the sizing on that is going to be because we need to get a sense on the interest we have on it,” Hill said. “If there is a lot of interest then it makes sense for us to takeout more than less.”
Detroit is authorized to issue up to $500 million in limited tax general obligation bonds for the purpose of refunding or refinancing all or a portion of the City's outstanding LTGO bonds. The LTGO bonds include $245 million of income tax-backed bonds, $360 million of 1st and 3rd lien distributable state aid-backed bonds, and $632 million of B Notes. The unsecured bonds 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.
John Hageman, Hill’s chief of staff, said in an e-mail that the city will only proceed with the transaction if it meets its objectives. “If the City does proceed, then the City plans to do this before the end of the calendar year, but does not expect the pricing to happen concurrently with the new money UTGO bonds,” he said. Hageman said that Goldman Sachs would be lead manager on the refunding transaction.
Detroit’s Downtown Development Authority is separately working on a transaction to refinance the senior debt on Little Caesars Arena, also expected before the end of the calendar year. The underwriter has not yet been selected for the DDA transaction. The original Series 2014A bonds in the amount of $250 million were issued through the Michigan Strategic Fund and the bonds have a mandatory call at January 1, 2019.