CHICAGO — The Michigan Municipal Bond Authority is expected to enter the market today with $255 million of notes to help cover Detroit Public Schools’ anticipated fiscal 2010 cash shortfall.
The deal is part of what has become a twice-annual cash-flow borrowing for DPS. The notes carry a pledge of all state aid to be appropriated by Michigan to the district starting in fiscal 2011.
As part of the transaction, the threat of bankruptcy for the long-struggling district appears to be temporarily lifted. Among the provisions of an amended financial agreement reached with a bond insurer and outlined in bond documents, the district’s emergency financial manager, Robert Bobb, agreed he would not file for bankruptcy as long as he serves in that post.
The borrowing comes as DPS enters its second year of state-mandated emergency fiscal management. Bobb — who previously warned that filing for Chapter 9 might be the only way to lift the district out of debt — is in the midst of a second one-year term that expires next March.
Proceeds from today’s note sale will allow the district to meet an expected cash-flow deficit in fiscal 2010, which ends June 30. The notes will mature on March 21, 2011, and are subordinate to the payment of the district’s outstanding notes issued in 2009 and 2005 as well as its limited-tax general obligation pledge.
JPMorgan and Loop Capital Markets LLC are underwriters. Dykema Gossett PLLC is note counsel.
Standard & Poor’s assigned a rating of SP-1 to the debt, based on the state aid pledge and the expectation that debt-service coverage will total at least 1.20 times in fiscal 2011.
The rating is limited by the fact that state aid is likely to fall below the district’s current projections and the district’s own fiscal challenges, analysts said.
Bond documents on the notes include discussion of an amended financial agreement reached with Assured Guaranty Municipal Corp. — formerly Financial Security Assurance Inc. — which is the bond insurer on a chunk of the district’s outstanding long-term debt. One of the key features of the agreement is Bobb’s undertaking that he will not file for bankruptcy as long as he serves as EFM. Only the EFM has the authority to file for bankruptcy for the district.
The district is preparing to embark on an ambitious transformation plan that includes the closure of 44 schools across the city in June. Bobb last week announced a five-year master plan that includes spending cuts and bond sales to help finance construction of new schools and renovation of some existing facilities.
DPS maintains 172 schools and faces an accumulated general fund deficit of more than $300 million. After years of sharp declines, enrollment now hovers around 90,000. District officials this week announced a series of public meetings on the school closings.
