CHICAGO — In another move aimed at helping fiscally stressed municipalities enter the bond market, Michigan lawmakers have sent Gov. Rick Snyder legislation that would allow them to refinance outstanding financial recovery debt.
HB 4716 is crafted to help Highland Park, which is under emergency management, refinance $28 million of variable-rate financial recovery bonds issued in 2008 to fund pension obligations.
The legislation allows Highland Park to provide additional security for the bonds by hiring a third party to collect and set aside the revenue used to pay the bonds, carving out the property taxes and state aid pledged to the bonds and sending it directly to a bond trustee without the city handling the money.
The so-called lockbox structure is intended to provide protection against bankruptcy for investors who purchase the debt or banks that provide liquidity support.
If Highland Park refunds its debt with the lockbox feature, it would mark the third time a Michigan issuer has used the structure to enter the market. Detroit first used the feature when it issued fiscal stabilization bonds in 2010.
In Detroit’s case, the pledged revenue came from state revenue aid, not property taxes. It was sent directly to a trustee, who then set aside the amount necessary to cover debt service before releasing the rest of the aid to the city.
In June, lawmakers passed a bill aimed at helping Ecorse, which, like Highland Park, is located in Wayne County and under emergency management. The law allowed Ecorse to issue new-money, property-tax backed debt enhanced by the intercept feature to pay off several lawsuits.
Ecorse paid interest rates in the 6% range to sell $9.7 million of financial recovery bonds.
“For cities that are struggling and facing the revenue climate that local governments especially are facing, I do think that you’re going to see more of a push to [the intercept feature] where there isn’t good credit access otherwise,” said a market participant who is familiar with the Ecorse and Highland Park deals and who asked to remain anonymous. “I do think the lockbox structure is going to become more common for these tough communities.”
So far, HB 4716 would apply only to Highland Park and Ecorse, as they are the only two municipalities with outstanding financial recovery bonds.
Since issuing the bonds in 2008, Highland Park has been forced to pay increasingly high prices for the letter of credit from Fifth Third Bank that supports the debt. Bond documents stipulate that principal payments will be accelerated if the LOC on the bonds is not extended.
“Every year or so, Highland Park was going to have to go out and seek another letter of credit, and they’re in a situation where they’re paying significantly more money than they anticipated,” the source said. “They need to do something.”
The cash-strapped Detroit suburb has renewed the LOC twice, through September 2013. Working with Robert W. Baird & Co. as its financial advisor, the city is now considering whether to refund the debt in a fixed-rate mode with the lockbox feature or maintain it in a variable-rate mode with the additional security. Either way, the enhancement is expected to lower borrowing costs.
The refinancing would need approval from the emergency management loan board and would be issued through the Michigan Finance Authority.