CHICAGO — Holders of $5.2 billion of Detroit water and sewer bonds are playing a key role as Detroit attempts to execute the last big bargain struck during the city's bankruptcy.
As Detroit and three regional counties work to form a new water and sewer authority, winning bondholder consent within six months is needed to complete the deal.
The Detroit Water and Sewerage Department must secure the approval of at least 51% of bondholders to shift the bonds from the DWSD to the new Great Lakes Water Authority. Most of the debt is insured, and insurers are expected to act as proxy for the bondholders.
Bond insurer Assured Guaranty Municipal Corp. wraps $1.92 billion of the debt, according to a spokesman. National Public Finance Guarantee Corp. insures $1.6 billion of the bonds. A spokesman for National declined to comment on the insurer's position on the GLWA. Assured didn't comment by press time.
The new authority was one of the last big bargains struck during the city's Chapter 9 case. It calls for Detroit to lease its water and sewer system, one of the largest in the nation, to Wayne, Macomb, and Oakland Counties for 40 years. The city in return will get $50 million in annual lease payments and retain control of the infrastructure located within city limits.
The system serves nearly five million customers and is the largest in Michigan.
It's the second time that bondholders have played a key role in the city's restructuring efforts. The water and sewer bonds were front and center in the final days of the city's bankruptcy. The city wanted to impair the revenue bonds by 40% or more by either stripping out call protections or replacing current coupons with lower rates, despite a revenue pledge that the market considered strong enough to escape bankruptcy unscathed.
The city ended up offering to tender the bonds, a complex financing completed in September and October, the final months of the bankruptcy. As part of the deal, Bondholders tendered a total of $1.5 billion of bonds, or 28% of the DWSD's outstanding debt.
The six-member board of the GLWA signed the lease on June 12. The deal won't be final, however, until the authority meets various conditions.
Many of the conditions are related to the DWSD's large and complex debt portfolio.
In addition to winning 51% of bondholders' consent, the GLWA also needs to pass a new master bond ordinance that authorizes the lease and largely reflects DWSD's current ordinance.
The new authority is required to uphold certain current bond covenants, including coverage requirements for both additional bonds test and rate covenant that requires coverage of 1.20 times, 1.10 times, and 1.00 times for senior- and junior-lien debt, respectively, according to the lease.
The new authority is required to maintain a flow of funds to bondholders that was part of the tender offer. The DWSD agreed to keep debt-service payments second only to operation and maintenance costs and ahead of deposits to all other accounts.
The DWSD also needs to get confirmation from a ratings agency that the ratings assigned to the bonds would not be lower than the current ratings on the DWSD bonds. Bond counsel would need to deliver an opinion that the new debt will continue to be tax exempt. And as long as bonds are outstanding, neither the city nor the authority can terminate the lease, whether or not an event of default has occurred.
On the pension side, the authority needs to reach an agreement with Detroit and the Detroit General Employees Retirement System on how to manage the authority's pension obligations. The lease allows the new authority to issue bonds to fund its pension obligation.
The conditions must be finalized by Jan. 1, 2016.
Bonds with a 2039 maturity and 5.25% coupon were yielding 4.31% in early June trading, according to the Electronic Municipal Rule Making Board web site. A chunk of the bonds with a 2023 maturity and 5% coupon yielded 3.11% in May trading, down from 6% in July, 2014 trading, when the city proposed impairing the debt.