CHICAGO — A Michigan city in receivership paid interest rates in the 6% range to sell a chunk of financial recovery bonds last week.
The single-A rated bonds sold by Ecorse featured an intercept structure crafted to reassure bond investors who fear the city could go bankrupt.
Detroit used a similar structure when it sold deficit bonds last year, and other fiscally stressed cities are considering the sale as a model of how to enter the market without paying a large penalty.
Ecorse priced $9.7 million of bonds last week in two series. It paid 5.8% interest on $4.28 million of Series A bonds with a final maturity of 2026, a spread of 257 to treasuries, according to Thomson Reuters.
The city paid 6.5% on $5.2 million of bonds with a 2035 final maturity.
The Series A bonds were later trading with a 6% yield on the secondary market, and the Series B bonds with a 6.65% yield.
Robert W. Baird & Co. was the underwriter. Miller, Canfield, Paddock and Stone PLC was bond counsel, and helped craft the bond deal.
The debt is secured by a pledge of property taxes from the city, which includes a judgment levy and an operating levy.
Before the borrowing, the city’s emergency financial manager argued that on its own, Ecorse was not creditworthy enough to enter the market unless the state amended its financial recovery bond law in a way that would “calm prospective bondholders’ anxieties about lending to this cash-strapped city,” according to information given to legislators about the bill.
The bonds feature a so-called lockbox structure that ensures that 100% of pledged revenues will be held with the trustee until debt service obligations are met.
The structure is meant to keep pledged revenue out of the hands of the city, increasing the chances that in the case of a municipal bankruptcy, a judge could rule that the revenue segregated for the borrowing is protected because it was never under the city’s control.
Ecorse hired Comerica Bank to collect and distribute all property tax revenue to the bond trustee before releasing the remainder to the city and its subdivisions. It has also hired an agent to ensure that the levies provide at least three times coverage on the bonds at all times.
The debt has a statutory lien on two property tax levies to support debt service.
Located in Wayne County about 10 miles outside Detroit, Ecorse is a lower-income suburb of 9,500 that came under state-mandated emergency financial management in October 2009.
Proceeds from the bond issue will pay off a series of lawsuits that otherwise would have forced the city to nearly double its property tax rate.