CHICAGO - Detroit Mayor Kwame Kilpatrick said this week the city is aiming to enter the market - through a conduit issuer - as soon as May with a $365 million casino tax-backed revenue bond issue that would finance his proposed economic stimulus package.

But whether officials can move that quickly depends in part on gaining approval from the City Council and possibly the state amid a tense political atmosphere in the weeks after the mayor was indicted on eight felony charges stemming from testimony in a 2007 whistleblower trial.

Politics aside, at least one market participant said the mayor's political woes would likely prove less significant to investors than the city's fiscal position and the timing of the transaction.

In a presentation to the City Council this week, Kilpatrick provided more details on the deal, which he first proposed last month in his state of the city address.

Under the mayor's plan, the Detroit Economic Growth Corp. would act as the conduit issuer for the sale of the bonds - a move that city officials say would allow the city to bypass state approval. Use of the conduit would also allow the city to avoid bumping up against its debt ceiling.

"Given how we have pulled ourselves out of a financial morass, we don't want to burden our own debt profile - we prefer to use this economic device for the purpose it was created," deputy mayor Anthony Adams said. "We want to continue to have a positive rating."

The city can issue $658 million more in debt before it reaches its debt cap, Adams said. It currently has $2.6 billion in outstanding debt.

The DEGC would borrow roughly $365 million - $65 million of which would be used to make debt service payments for the first three years. Of the $365 million issue, roughly $265 million would sell as tax-exempt while the remaining $100 million would be taxable, with those proceeds going toward establishing a $75 million fund balance for the city, Adams said.

The bonds would be backed by casino revenues, which Kilpatrick estimates currently at $197 million for fiscal 2008 and growing to $220 annually within the next three years. The city would set aside $29 million from that revenue annually to pay debt service on the bonds.

JPMorgan would act as senior manager on the transaction, with Loop Capital Markets LLC acting as co-senior manager. Robert W. Baird & Co. and Phoenix Capital Partners will serve as financial advisors. Lewis & Munday will act as bond counsel.

Adams said the deal would not require state approval, but state treasury officials said it was too early to make that determination.

"We have not received any information about the proposal," treasury spokesman Terry Stanton said. "Whether the deal needs prior approval from the state depends on how the deal would be structured."

In order to enter the market as early as May, the council would need to vote on the plan in the next couple of weeks. That timeline may be too ambitious, as the council has said it would hold hearings on the plan.

But considering the recent turmoil in the municipal bond market, the later the city prices the bonds the better, said one analyst.

"From such an awful market environment [recently], you're actually in a better market environment right now," said John Mousseau, municipal bond analyst at Cumberland Advisors. "For well-priced deals with names that are recognizable, there will be great reception for bonds. In another month, for a credit that needs a little bit of an educational process, the reception will be better."

As for the scandals surrounding Kilpatrick, Mousseau predicted that investors would care less about that than about the structure of the transaction. "I think the investment community as a whole isn't worried about the mayor's transgressions so much as about the city's overall finances," he said.

Standard & Poor's and Fitch Ratings assign BBB ratings to Detroit's unlimited-tax general obligation debt. Moody's Investors Service assigns a Baa2

The scandal began in January when the Detroit Free Press published a series of flirty text messages between Kilpatrick and his then chief of staff Christine Beatty that appeared to contradict their earlier testimony in a 2007 trial.

 

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