CHICAGO — The Michigan Finance Authority plans to enter the market Thursday to sell $198 million of one-year notes on behalf of the Detroit Public Schools.

The sale is part of what has become a twice-annual cash-flow borrowing for the struggling district.

DPS has been under state-mandated emergency financial management since 2009, and is facing an accumulated deficit of $363 million as it begins fiscal 2011.

The district is also in the midst of a $500 million capital campaign to renovate at least 18 school facilities over the next three years.

Michigan in late March sold $225 million of cash-flow notes for the district. This week’s borrowing is the first for fiscal 2011, with another likely coming next March. 

The recent borrowings have been somewhat larger than usual, according to deputy state treasurer Tom Saxton.

“Clearly when you have an increasing deficit, that situation manifests itself into cash flow,” he said. “In terms of their cash flow, they’re not alone in this.”

JPMorgan and Loop Capital Markets are the underwriters. Dykema Gossett PLLC is counsel for the note deal.

Standard & Poor’s rates the debt SP-1 based on the pledge of all fiscal 2011 state aid to repay the debt and a structure that requires Michigan to distribute the aid first to the bond trustee before releasing it to DPS.

The rating is limited by the fact that state aid is likely to decline due to falling student enrollment, as well as the district’s own fiscal challenges, analysts said.

The notes mature in August 2011 and are subordinate to the payment of the district’s outstanding notes issued in 2009 and 2005.

Bond documents include discussion of an amended financial agreement reached with Assured Guaranty Municipal Corp. — formerly Financial Security Assurance Inc. — which insured  a chunk of the district’s outstanding long-term debt.

One of the key features of the agreement is a reiterated pledge by DPS emergency financial manager Robert Bobb that he will not file for bankruptcy as long as he serves in the post. Only the EFM has the authority to file for bankruptcy for the district.

Without the note issue, DPS officials projected that the general fund cash balance at the end of June 30, 2011, would be negative $258 million. With this week’s borrowing, followed by the March 2011 borrowing, the balance is expected to total $26 million.

Detroit Public Schools maintains 172 schools. After years of sharp declines, enrollment now hovers around 85,000 students.

The district this week launched a campaign featuring comedian Bill Cosby aimed at boosting fall enrollment.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.