CHICAGO -- Detroit Public Schools sold $92 million of one-year notes Tuesday with a 4.37% interest rate, paying a steep penalty compared to most municipal short-term debt, but in keeping with the district’s track record in recent years.
The borrowing, issued through the Michigan Finance Authority, made DPS one of only a handful of local Michigan issuers to come to market since Detroit filed for bankruptcy July 18, with the first deal that carried a Detroit name.
The final 4.37% rate for the notes, which mature in August 2014, was down from 4.5% in initial early morning pricing.
In comparison, the rate on triple-A rated municipal notes with a one-year maturity is 0.32%, according to Bloomberg.
Despite talk of a market penalty for Detroit’s bankruptcy, Tuesday’s rate is in keeping with the district’s reception in the short-term market in recent years.
In March 2011 DPS issued $231 million of short-term notes with a one-year maturity. Yields were as high as 6.65%. In August 2010, the district sold $187 million of notes at 4.75%. An April 2009 $256 million note issue saw an interest rate of 5%.
The Michigan Finance Authority last week sold $18.6 million of bonds on behalf of Ypsilanti Community Schools. The 2015 maturity paid a yield of 1.48% with a 3% coupon.
JP Morgan and Loop Capital Markets underwrote Tuesday’s sale. Public Financial Management Inc. is the advisor.
The debt carries a short-term rating of SP-1 from Standard & Poor’s.
The notes were issued to smooth out cash flow for the school district, which is a separate unit of government outside city of Detroit authority. Like the city, DPS is under emergency management oversight.
Gov. Rick Snyder recently named Detroit chief financial officer Jack Martin as the new emergency manager of the district to replace Roy Roberts.
The state has controlled DPS, which is plagued by falling enrollment and chronic deficits, since early 2009.
The $92 million of one-year notes are backed by a state aid pledge further enhanced by a so-called intercept feature, in which the state aid goes directly to the bond trustee for debt payment without going to the district.
Despite the safeguards, risks are seen in the Detroit name, the district’s own chronic financial stress, and the fact that state aid is tied to enrollment. Declining enrollment is one of the district’s central problems.
S&P said that state aid would still be sufficient to cover debt service by at least 1 times even if enrollment declined by as much as 33% this year.
The district receives about $31.8 million monthly in state aid. No debt senior to the notes can be issued as long as the notes are outstanding. The notes were issued under a junior subordinated lien with a third priority behind a $211 million 2011 issue that matures in 2021 and a $126 million 2012 issue that matures in 2020.
The offering statement informs potential investors that the emergency manager has no intention of asking Michigan Gov. Rick Snyder for authority to file Chapter 9 bankruptcy. Such a request is permissible in the absence of a reasonable alternative to rectify the district’s financial emergency. The document still warns of the potential pitfalls such a filing could have on the value of the notes. The offering statement notifies investors that despite the authority’s lien on state aid being built into statutes “the enforceability of this lien in the event of a Chapter 9 bankruptcy case of the district under the U.S. Bankruptcy Code is uncertain.”
Orr took the city into its historic Chapter 9 bankruptcy July 18 and his attempts to treat the city’s GO debt as unsecured have rattled the municipal market, especially in Michigan. Three issuers slated to bring negotiated deals to market have pulled or postponed them as investors demanded too steep a premium.