CHICAGO — Detroit's Cobo Hall, the riverfront convention center that a few years ago struggled to survive, is now touting itself as a model of regional cooperation as the bankrupt city tries to rebuild itself after bankruptcy.
Cobo, home to the prestigious North American International Auto Show, is one of the city's largest economic engines. In 2008, with automakers threatening to pull out of the cramped and aging facilities, a new bond-issuing authority made up of regional members took over the convention center.
Cobo supporters, noting the agency doubled its revenue in 2011 and turned a profit in 2013, say the arrangement sets a strong example for Detroit emergency manager Kevyn Orr, who wants to set up various authorities with regional partners that will take over major Detroit assets while the city retains ownership.
"We knew from the beginning everybody was going to be watching us," Patrick Bero, Cobo's chief executive officer and chief financial officer, said in an interview last week.
"This was highly controversial at the time, and there were many calls among city leaders that the state was coming in and stealing one of its crown jewels," said Bero. "We're delivering what we believe is the model for regional cooperation in this state, and we are fully aware that our example will open doors for other regional efforts, such as transportation, lighting, and water authorities."
The Detroit Regional Convention Facility Authority is now gearing up to come to market with $300 million of long-term tax exempt bonds in its first public financing, one that comes amid the market turbulence caused by Detroit's municipal bankruptcy.
The new financing is driven by a November 2014 deadline, when the interest rates on $315 million of privately placed debt spike to 7%.
Ahead of the deal, the authority defeased $22 million of outstanding bonds it inherited from the city when it took over the facility. The defeasance in part is an effort to show investors that not all Detroit bondholders will be forced to take a haircut.
"It's critical that the markets understand who we are," Bero said. "We are a state credit. What's happening with the city is going to happen with the city. Our story is that we are completely removed from that."
The state legislation enabling the authority featured a stream of three new state-based revenues to subsidize the facility.
The liquor, cigarette, and hotel taxes support debt service as well as Cobo's operations.
The state operating subsidy, scheduled to decrease over time, totaled $9 million in 2012. The debt-service subsidy supports capital borrowing of $299 million through 2039.
In 2010, it issued $80 million of short-term debt to finance a $20 million payment to Detroit for the 30-year lease as well as a series of emergency repairs. The board undertook an overhaul of the facility and its finances. It reduced operating expenses by $6 million.
The authority in 2011 refinanced the 2010 notes and borrowed another roughly $260 million, in a private placement with three banks -JP Morgan Chase, PNC Bank, and Wells Fargo NA. The proceeds financed the $280 million renovation, which is now 85% complete.
The new deal will roll over the short-term private placement into long-term bonds. The agency expects to float the bonds on the public market, but said another private placement is possible if it gets a better deal that way.
Bero is going to begin to craft the financing package in late March and release a request for proposals for underwriters by early June, he said.
The facility's financial advisor, First Southwest, estimates the Michigan penalty to be around 15 to 30 basis points, and the Detroit penalty another 65 to 85 basis points on top of that, Bero said.
Miller, Canfield, Paddock and Stone PLC is the authority's bond counsel.
"If it passes the scrutiny of professional credit analysts and gets the appropriate ratings, I think it will sell, but it will sell at a yield," said Richard Ciccarone, president and chief executive officer of municipal research firm Merritt Research Services LLC.
"There are so many reasons why you want a story like that to succeed," Ciccarone added. "It's also in the best interest of the bondholders. They're buying a name that looks like it's turning the corner or structured in a way that's sound, and they're putting money to work for something that's rebuilding America in such an innovative way, that's not only better than normal yield but they're doing good with their money."
Cobo wants to secure the long-term financing by October, before the short-term notes expire in November. After that, the interest-rate jumps to 7%. It's now at 70% of 30-day Libor plus 150 basis points on the tax-exempt piece of the debt, which makes up the majority of the financing. That translates into around 1.67%, Bero said.
As part of the deal, the banks required the authority to buy an instrument to hedge against the risk of interest rates rising to the point where the authority could not make payments.
Cobo purchased a so-called interest rate cap, effective from 2014 through 2021, from the Bank of New York for $2.2 million. It limits the interest rate on the 2011 bonds to 7% in 2014 and 7.5% through 2021. The hedge will likely be terminated with the new financing, which is expected to be in a fixed-rate mode.
Debt service on the new bonds will be payable from a piece of the state cigarette, liquor and hotel accommodation taxes. Coverage levels will be around three to four times debt service, Bero said, and he's hoping to achieve ratings in the single-A category.
In 2011, when the authority interviewed 11 banks as part of the earlier financing deal, Bero said every team suggested that they find a way to drop "Detroit" from their name.
But keeping the name is required under the legislation that created the authority, he said. And Bero is confident that the credit can secure a reasonable financing despite the name.
"We're going to make the name Detroit mean something again," he said. "We're going to be the tip of the spear in revitalizing Detroit and this region."
