CHICAGO — Junk-rated Detroit Public Schools will bring $252 million of refunding bonds to market this week that feature enhanced double-A ratings based on Michigan’s full-faith-and-credit pledge to repay the debt.
The borrowing is expected to generate interest-rate savings by refunding bonds originally issued in 1998, 2001, 2002 and 2003.
Now into its fourth year of emergency management, DPS continues to struggle with steep enrollment declines and state aid cuts. The specter of bankruptcy hangs over the district, and bond documents include a section that addresses the concern for investors.
One worry: the cash-strapped district faces the prospect of being forced to pay $44.1 million annually over the next four years to pay off a chunk of bonds issued in 2004 and insured by Assured Guaranty Inc.
The insurer warned the district last year that it would impose an accelerated payment schedule if the Michigan Legislature did not pass legislation protecting the Assured-backed bonds from the effects of bankruptcy.
Lawmakers passed the law, but not until early 2012, and DPS is now negotiating with Assured to avoid having to make the accelerated payments, according to bond documents.
The prospect of a Chapter 9 is lessened by the state’s one-year-old emergency management law, which requires the governor’s approval, documents say.
As well, the state education department prohibited DPS leaders from even recommending bankruptcy when it approved the district’s current deficit-elimination plan, according to bond documents. The ban remains in effect through the term of the five-year deficit elimination plan.
If DPS were to declare bankruptcy, however, the risk remains that the automatic stay provisions of the bankruptcy code might prevent or delay the district from making debt payments on the bonds, though the state treasurer’s obligation to pay the bonds may remain unaffected, bond documents say.
The state has controlled the district since early 2009, when it appointed the first emergency manager.
The process has helped the district in some ways, said Matthew Butler, an analyst with Moody’s Investors Service, which gives the district the below-investment-grade rating of B1 with a negative outlook.
“Overall it’s probably offered some sort of benefit, in terms of allowing the state to get information more quickly and help out more quickly if needed,” Butler said.
“If you look at just operating results, in 2011 the district did chip away at its deficit and is showing some signs of stabilization.”
The refunding is tentatively set for Wednesday. Siebert Brandford Shank & Co. is senior manager. Robert W. Baird & Co., Hutchinson Shockey Erley & Co., JPMorgan and Loop Capital Markets LLC are also on the underwriting team. Lewis & Munday is bond counsel and Public Financial Management Inc. is financial advisor.
Based on the bonds’ participation in the Michigan School Bond Qualification and Loan Program, Moody’s rates the debt Aa2.
Standard & Poor’s rates the state school program AA-minus. Both ratings are on par with Michigan’s own general obligation debt.
Under the program, if the district is unable to make debt payments on the bonds, the state will lend it the money from its school loan revolving fund. If the fund does not have enough money, Michigan is required to make a loan from its general fund or issue GO debt to cover the payment.
It’s uncertain how much the school district expects to save with the refunding. Officials did not return phone calls for comment.
Meanwhile, the district continues to negotiate with the Michigan Treasury and Assured Guaranty to avoid the accelerated payments on the Assured-insured bonds backed by state aid.
Alternatives include reaching a new agreement with the insurance company or refinancing the 2004 notes. The district could also cut back on spending to generate enough cash to pay off the accelerated payments, according to the bond documents.
“There can be no assurance that the acceleration can be avoided or that the impact of the acceleration on the district’s revenue can be mitigated,” the documents say.
DPS has $2.1 billion of outstanding bonds. The district’s debt is limited to 15% of its state equalized value, which would mean a bond limit of $1.5 billion based on the valuations for fiscal 2012.
The limit, however, does not include bonds that are part of the Michigan School Loan Revolving Fund, or short-term state-aid backed bonds like the Assured-backed bonds.
Interest rates on the bonds to be refunded for savings range as high as 6% on 2002A bonds that are maturing through 2032.