CHICAGO — Detroit Public Schools’ emergency financial manager Robert Bobb is pushing Michigan lawmakers to enact a bill that would insulate a chunk of the district’s debt from bankruptcy to address concerns by the debt’s bond insurer.

Testifying Wednesday before a joint Senate and House education committee, Bobb said that bond insurer Assured Guarantee Ltd. has a “gun to our heads” by blocking an urgently needed cash-flow borrowing unless the state enacts a law that essentially protects the Assured-backed bonds if the district opts to file Chapter 9.

Without the new law, DPS will not be able to issue $219 million of notes in March, because Assured will require it to accelerate its debt payments, which the cash-strapped district cannot afford. That would require DPS to pay $20 million over the next five years on top of regularly scheduled principal and interest ­payments.

“They have basically held a gun to our heads, saying, 'We want this protection to ensure there is no issue with respect to any Chapter 9 bankruptcy,’ which they think would put them in jeopardy,” Bobb told lawmakers. “We must obtain Assured’s waiver to proceed with the March borrowing, and we believe that this proposal will address Assured’s concerns.”

Assured insures $200 million of debt issued by DPS in 2005. The debt issue, originally insured by Financial Security Assurance Inc., now part of Assured, was a deficit financing that converted one-year notes in 2004 into 15-year notes that mature in 2020.

DPS has yet to unveil the bill, so details are scarce. In essence, the law would insulate from bankruptcy school district debt that is issued as a cash-flow borrowing — typically short term — through the state aid intercept program. The rest of a district’s outstanding debt would remain outside the purview of the new law.

“It is confined to a particular section of the school code and the school aid act,” said Amanda Van Dusen, an attorney at Miller, Canfield, Paddock and Stone PLC who has worked on the legislation.

Only a bankruptcy judge can ultimately make such decisions, but the bill’s language is modeled on past bankruptcy judge decisions, according to Van Dusen. “It mimics structures that bankruptcy courts have upheld in the past,” she said. “We can’t guarantee it would work, but it is our best effort to insulate that debt from a district bankruptcy if that were to occur.”

In his testimony, Bobb linked Assured’s fears to growing national concerns surrounding the municipal bond market.

“Because of all the national headlines raising concerns about municipal and school district bankruptcies, Assured is looking to protect the DPS debt it insures from a potential filing,” he said. “We have seen firsthand the impact on the district’s borrowing costs that investor concerns can have.” 

Bobb noted that in 2009, when the district publicly floated the idea of bankruptcy, interest rates on its one-year notes rose to 9.5% from 5%. An Assured spokesperson confirmed the company would seek accelerated payments if necessary.

With nearly a 65% deficit in its general fund, the Detroit district, like the city it serves, has repeatedly had to assuage investor concerns about bankruptcy. The investor road show on its most recent bond issue included a section on how debt would be treated in a bankruptcy scenario.

Bobb told lawmakers he is “not even remotely” considering bankruptcy despite DPS’ fiscal stress.

“We’ve done a lot of research, and any filing of Chapter 9 would not be good for the state and would create problems for other jurisdictions going into the bond market,” Bobb said. “But that’s a larger conversation that needs to take place.”

Part of that conversation has been taking place in Lansing this week as lawmakers hold a pair of hearings on Public Act 72, the state’s main law for fiscally distressed local governments. A five-bill package that would overhaul the bill was introduced to the House Wednesday morning.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.