DALLAS -- The Michigan Finance Authority completed the private placement of $226.3 million of bonds Thursday to refund Detroit Public Schools paper that would have lost its state aid backing at the end of the week.
The deal resolves the fate of the existing 2011 and 2012 bonds that had lost their investment grade ratings amid uncertainty over how they would be handled after the restructuring of Detroit Public Schools. The refinancing was authorized by state legislation signed into law in June to reorganize DPS into two separate districts effective July 1.
State aid, as of the Oct. 1 beginning of the new fiscal year, shifts to the newly formed district that operates schools while the former district remains intact only to collect taxes and repay bonds. The MFA did not announce how it planned to restructure the bonds until recently, leaving rating agencies and other market participants to worry over the bonds' fate.
The MFA said in a press release that it directly placed the DPS bonds with JP Morgan Chase Bank, N.A. and JPMorgan's wholly owned affiliate, DNT Asset Trust.
The outstanding DPS bonds were refunded at par plus a redemption premium and accrued interest with an extraordinary mandatory redemption on June 1, 2017. The net interest cost on Thursday's refunding issue was 3.78%. The bonds mature March 31, 2023. The existing bonds also mature in 2023.
"The private placement yielded excellent economics and allowed the MFA to complete the refunding on a short timetable," state Treasury spokeswoman Danelle Gittus said of the decision to use a direct placement over a public offering.
"This is the benefit of an issuer having a committed industry partner who can provide a capital loan when the broad market perhaps would not," said Matt Fabian, a partner at Municipal Market Analytics, which has been tracking the bonds' status.
"I am not surprised that DPS had to do a direct private placement," said one buyside source following the issue. "There is no appetite for the credit at a level that made sense to do the refunding. The current bonds that are being taken out with this refunding were cheaper to fund (with the current debt service schedule) than what the primary market would demand today for a bond without the state intercept mechanism."
The source expressed surprise JPMorgan would do the deal for a 3.78 yield on a credit that would be rated triple-B or C, "especially since there is no more state aid, let alone intercept."
An existing operating levy of roughly $50 million to $60 million per year will go to pay off debt service on the refunding bonds. Gittus said the levy expires in 2022 but would provide revenue collections through the bonds' maturity.
The MFA said there was no public offering statement for the transaction.
The outstanding bonds had initially carried A level ratings from S&P Global Ratings because of the state aid pledge. They also carried a limited tax general obligation pledge, but the district's underlying ratings on its GOs are in junk territory.
On Sept. 14, S&P downgraded the bonds to B. S&P said that with the October fiscal year deadline looming there was greater uncertainty as to whether bondholders would receive full and timely payment on their bonds.
Moody's Investors Service recently revised the outlook on DPS' Caa1 issuer rating to developing from negative.
"We have a developing outlook because we are waiting to see what the structure and repayment schedule is on the refunding bonds," said Moody's this earlier this week.