CHICAGO — The junk-rated city of Detroit will access the market through a Michigan conduit Thursday as it seeks to raise $100 million to finance a new police headquarters in a vacant MGM casino.
The sale of $100 million of taxable general obligation bonds is one of two deals this week from the Michigan Finance Authority, the state's main bond issuing authority. Tuesday, the authority began refunding $535 million of school loan bonds. The fixed-rate portion of the transaction is scheduled for Wednesday.
The sale on behalf of Detroit marks the city's first use of the state as conduit issuer for new-money GO debt. Detroit has not issued new-money GO debt in three years, due partly to its below-investment-grade ratings.
The bonds carry a subordinate lien on the city's state revenue aid. Officials hope the state aid pledge and the use of the MFA will enhance the marketability of the debt.
The MFA will issue the bonds through its local government loan program.
The security is subordinate to the first-lien state aid pledge that backs $250 million of deficit elimination bonds Detroit issued earlier this year. As part of the current financing, the city pledged not to issue any more bonds with a first lien on the state aid.
Siebert Brandford Shank & Co. is senior manager. Bank of America Merrill Lynch, JPMorgan, and Morgan Stanley round out the underwriting team. Dickinson Wright PLLC and Miller, Canfield, Paddock and Stone PLC are co-bond counsel. Robert W. Baird & Co. is the city's financial adviser.
Moody's Investors Service rates the bonds A1. Analysts said the rating is based on the state aid pledge, as well as a legal structure that provides satisfactory bondholder protection. Maximum annual debt-service coverage is strong at 9.8 times based on the amount of total pledged state revenue the city received in 2009.
Standard & Poor's rates the debt AA-minus. Ahead of the sale, it also boosted its rating to AA from AA-minus on the $250 million of deficit bonds sold earlier in the year due to the city's promise not to issue any other debt with a first lien on state aid.
Both 2010 series feature the state's pledge to send aid directly to the trustee. The trustee then sets aside a certain portion of the aid to cover debt service and releases the rest of the money to Detroit's general fund once the city covers the payment with property tax revenue.
The bonds also feature a pledge of the city's full faith and credit. The city expects to levy a property tax to cover debt-service payments on the bonds, according to Moody's.
The bonds are part of the city's GO authorization of $160 million that voters approved two years ago.
Detroit plans to buy the former casino from MGM Grand Detroit LLC for $6.9 million. Renovations are expected to total up to $70 million.
Michigan lawmakers earlier this week approved a bill that includes $15 million for a new crime lab for Detroit. The new lab also could be located in the new headquarters building.
Remaining proceeds would be used for a variety of other capital projects.
Like Detroit Public Schools, Detroit's recent and severe fiscal stress has sparked rumors of Chapter 9 bankruptcy. Like with DPS, bond documents include a discussion of possible scenarios in the case of bankruptcy, which is currently prohibited by state law. Bond attorneys said it is likely a court would declare revenue that is set aside for debt payments as special revenue, which would help ensure continued payments on the debt.
The special revenue designation would likely mean that the revenues would not be subject to an automatic stay and that the city could continue to use the money to make debt-service payments after bankruptcy.
The other MFA deal this week is to restructure all of the outstanding debt issued by the state's school loan revolving fund program. All of the bonds are taxable.
The transaction will allow the state to shed a standby bond purchase agreement from Depfa Bank Plc, which rating agencies have downgraded repeatedly over the last two years. Originally issued in 2008, all the fund's bonds were variable rate. The refunding will keep $450 million of the debt in the variable-rate mode. Bank of America NA, PNC Bank NA, and Bank of Montreal are providing letters of credit securing $150 million each of the debt, according to Wayne Workman of Robert W. Baird, the state's longtime financial adviser.
The remaining $85 million will be fixed rate. That debt is scheduled to be priced Wednesday. Moody's rates the variable-rate bonds Aa1 based on the joint support of the banks and the state. Bank of America Merrill Lynch is the senior manager.