CHICAGO - Detroit plans to sell $1.8 billion of water and sewer bonds Tuesday through the Michigan Finance Authority in a transaction that allows it to finance the purchase of $1.5 billion of tendered bonds and further its efforts to exit bankruptcy.

The sale also includes a refunding tranche of currently callable bonds and will raise new money for sewer projects.

The bankruptcy court approved Detroit's tender purchase and refinancing on Monday. The deal removes one of the few remaining hurdles to the city's exit from Chapter 9. Finance team members said the sale was expected Tuesday.

The refinancing transaction - led by Citi - advances Detroit's efforts to exit Chapter 9 bankruptcy by achieving debt service savings of at least $240 million and removing a key class of creditors who objected to the city's plan to deal with its $18 billion.

Investors avoid potentially lengthy litigation and the possibility of losses imposed by the court. The deal removes the threat of court ruling on the status of the water and sewer revenue pledge which could set a legal precedent.

Judge Steven Rhodes' approval of the tender and refinancing marked the final hurdle to get the sale to market planned. The city hopes to close on the deal Sept. 4. The court's approval came after testimony Monday from Detroit's emergency manager Kevyn Orr, senior investment bankers, and water and sewer department officials.

Rating agency reports on the bonds were expected later Monday. The city is aiming to trade its junk ratings on existing sewer and water bonds for an investment grade level to reach its savings goals.

Rhodes overruled a bid by bond insurer Syncora Guarantee Inc., which insures some non- water and sewer city bonds, to secure the right to object.

The resolution of the water and sewer debts comes ahead of the start next week of the bankruptcy trial on the city's confirmation plan.

If the refinancing is completed as planned, four insurers with exposure on the bonds and investors will drop their objection to the city's plan of adjustment. The city already has settlement agreements in place with other key creditors including its pensioners and key bondholders and insurers.

The $1.5 billion of bonds tendered represents only 28% of the district's $5.2 billion of debt. The city hadn't announced a targeted goal when it launched the tender Aug 7.

In a statement Friday, the Detroit Water and Sewerage Department said the "tendered bonds represent approximately 93 % of the $2.2 billion of bonds specifically targeted, which was within the range of expected participation given the debt structure and the number of bondholders."

In addition to those investors targeted by the department, letters were sent to 48,500 individual investors. The tender offer closed Aug. 21. The bond sale will also current refund some callable bonds for traditional present value savings and include $190 million of new money sewer revenue bonds to raise at least $150 million for projects, according to information for investors attached to the offering statements.

Detroit Water and Sewerage Department commissioners voted to accept the tender results at a meeting Friday. The Detroit City Council and the Michigan Finance Authority, which will serve as issuer for the bonds, has approved the deal.

"There were two key goals from the onset of this undertaking," DWSD Director Sue McCormick said in a statement. "The first was to execute a tender/refinancing transaction that achieved meaningful dollars savings for our customers. The second was to seek an open market alternative to the impairment in the city of Detroit's plan of adjustment. Both of those goals were accomplished."

The city will realize the estimated savings over the next 27 years for present value savings of $107 million or 6.2% on the refunded bonds. The city expects annual savings of $11.4 million for the first 19 years. The city will have future refunding opportunities as more than a $1 billion will become refundable within the next two years.

The tender was devised as an alternative to the city's current bankruptcy plan for the revenue bonds, which calls for the impairment of nearly 50% of the debt by either stripping out call protection or replacing the current coupon with a lower interest rate. The program offered a variety of fixed prices, most of which were over 100 cents on the dollar.

If the refinancing is completed and holders of the tendered bonds are paid off, the city said it will amend its plan of debt adjustment and treat all the debt as unimpaired, with the untendered bonds continuing to get the scheduled principal and interest payments.

The finance team on the new transaction has yet to fill in key areas in preliminary bond documents, such as the size of the issue and the maturities. The debt will be a mix of term and serial bonds.

It could include up to 11 series, seven senior- and four second-lien bonds. Several of the series are expected to carry insurance from Assured Guaranty Inc., which will also insure reserve accounts for certain series. The finance team has said in court documents interest rates would likely be at 5.75% or lower, even for uninsured bonds.

In addition to senior manager Citi, Barclays, JPMorgan, Loop Capital Markets, PNC Capital Markets LLC, BMO Capital Markets, Comerica Securities Inc. and Jefferies round out the underwriting team. Dickinson Wright PLLC is bond counsel. First Southwest is the financial advisor.

Bond documents also warn several times that Detroit is at risk of filing Chapter 9 again. In that case, according to the city, the water and sewer bonds are subject to extraordinary optional redemption at par.

Market participants have offered differing assessments of whether the tender and refinancing represents a default. Since the bonds that are not tendered will continue to receive scheduled principal and interest payments Fitch Ratings said it does not consider the tender offer a distressed debt exchange. Municipal Market Advisors has called the tender in which some bondholders agreed to less than par prices a default.

The city previously reached agreements allowing for the transaction with insurers Assured, Berkshire Hathaway Assurance Corp., Financial Guaranty Insurance Co. and National Public Finance Guarantee, as well as an ad hoc committee of water and sewer bondholders that includes Blackrock Financial Management Inc., Eaton Vance Management, Fidelity Management & Research Co., Franklin Advisors Inc., and Nuveen Asset Management, plus trustee US Bank NA.

The bondholders also agreed that the DWSD can pay $24 million annually to the city's general employee pension fund as part of its operation and management expenses. The payment will come from a pension liability payment fund that will be funded after payments are made into the state revolving fund junior-lien bond and interest redemption fund, according to the documents.

The bonds are secured by pledged assets which include net revenues that come various sources such as payer rates.

The sewage disposal revenue bonds include seven series, C-1 through C-7. The first series is new money with a senior lien and insurance and the second and third also represent new money and carry a senior lien. The C-4 series are insured senior lien refunding bonds, the C-5 series are senior lien refunding bonds, the sixth series is a second lien refunding with insurance and the final one is a second lien refunding series.

The offering statement on the water supply system revenue bonds includes four series of bonds, D-1 through D-4.  D-1 is a senior lien refunding that will carry insurance. The second series is senior lien, the third is second lien and insured, and the fourth second lien.

In bold and capitalized writing, the offering statements warn: "In making an investment decision investors must rely on their examination of the authority, the city and the department and the terms of the offering including the merits and risks involved."

In a supplement issued late Monday, the offering statement reported the bankruptcy court's approval. The offering statement notes that the city and department intend to fund reserve requirements on the tranches insured by Assured Guaranty Municipal Corp. with reserve account sureties issued by Assured. New bondholders would agree to a change in the ownership of the system should a new regional authority be created as proposed that would become responsible for the water and sewer department's obligations.

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