CHICAGO — Triple-A Oakland County, Mich. is plowing ahead with a $300 million taxable bond issue in September even as other Michigan issuers shy away from a market still digesting Detroit's bankruptcy.
The county's southeast border traces 8 Mile Road, on Detroit's north, but Oakland County leaders believe credit quality will trump geography.
The county tapped Bank of America Merrill Lynch as the senior underwriter for the retiree health care deal Friday — the only bank on a shortlist of finalists who said the county would be able to avoid the so-called Detroit penalty.
Other underwriters predicted the county would be forced to pay between five to 15 basis points more due to fallout from Detroit.
Oakland expects to hire two or three co-seniors this week. The financial advisor is Robert W. Baird & Co.
The county is betting its underlying financial strengths and a strong investor outreach push will attract buyers and keep down any market yield fallout from Detroit, said Robert Daddow, the county's deputy executive.
"We've done quite a bit of talking to various folks, and they all said the people here who are going to be more troubled by the Detroit penalty are not so much the triple-A rated counties, but those that have a little lower ratings on the scale, down at the A level or below," Daddow said. "These people will really have to be Fred Astaire and Ginger Rogers to get anything out in this market."
Since Detroit filed for Chapter 9 bankruptcy protection July 18, the only two negotiated deals of more than $10 million that were on the calendar — from Genesee County and from Battle Creek — were both delayed. As of Wednesday morning, Saginaw County was still set to come to market Thursday with $60 million of taxable pension bonds.
Genesee and Battle Creek's deals both feature general obligation bonds, which are the target of particular market concern since Detroit emergency manager Kevyn Orr has proposed treating the city's GO debt as unsecured.
The Saginaw County and Oakland County deals, both for retirement obligations, are both taxable.
Oakland County plans to sell $300 million of taxable bonds to refinance certificates it issued in 2007 to pay off its other post-employment benefits liability. The bond issue is allowed under a relatively new state law that lets certain governments issue long-term debt to pay off their OPEB obligations.
The county currently pays 6.2% on the certificates, and expects the interest rate on the bonds to be in the low 3% range, a significant savings even if the county is forced to pay a penalty for its location near Detroit or in Michigan, Daddow said.
Ten banks responded to the county's request for proposals from firms seeking to be senior manager on the deal. The county whittled that down to a shortlist of four, and heard presentations from the banks last week. The impact of Detroit's bankruptcy was a topic of the oral presentations, Daddow said. Three of four banks predicted there would be a Detroit penalty and that it would range from five to 15 basis points, he said.
The exception was BofAML, which predicted the county would be able to avoid a penalty with strong investor outreach.
"It's never been much of a problem to sell our debt, but this might require more effort," Daddow said. "We might have to explain to folks on the purchasing piece why they ought not be concerned."
The county plans an Internet roadshow for early September or late August.
"Depending on what happens in Detroit in the next couple weeks, we might have to hop on a plane," Daddow said.
The county may also tinker with the structure of the deal, shortening the final maturity to 10 years from the current 13 years to help bring down interest costs. Meetings with Moody's Investors Service and Standard & Poor's are set for next week. The county expects it will be able to maintain its triple-A ratings based on its strong fundamentals, said Daddow.
"We are stellar in each of the categories that Standard & Poor's identifies [in its ratings criteria]," said Daddow. "One issue here is the economic environment, and we could get dinged, but I don't think it's enough to lose our triple-A. We've always compensated in other areas for what's happening in our region."
In 2007, Oakland was the first local government in Michigan to fund retiree health care costs when it issued $570 million of taxable certificates of participation. The deal saw a true interest cost of 6.23%. Growth in the two investment funds will allow the county to pay off $75 million of principal.
