DALLAS — Investor appetite for yield overcame any credit quality concerns buyers had as Detroit saw strong demand for its first post-bankruptcy general obligation/distributable state aid backed bond sale issue.
City officials said the deal exceeded projected savings and spreads tightened sharply from the city's last deal, a revenue bond issue that sold last year.
The city paid a penalty on the $615 million issue over comparably rated securities, but it was modest due to strong demand, market participants said.
The city was able to reprice some yields 11 to 14 basis points downward, market participants said.
A final pricing scale was not immediately available. The bonds sold Thursday through Michigan Finance Authority with Barclays running the books.
"We experienced broad and deep investor participation and the savings certainly (significantly) exceeded our expectations," city finance director John Naglick said in a statement. The city originally said it expected about $40 million in savings.
"People are hungry for some yield and were willing to overlook the idea of Detroit relapsing into bankruptcy and possibly having a different outcome than they did in the first bankruptcy," said Howard Cure, director of municipal bond research at Evercore Wealth Management.
Naglick sought to portray investor interest as a vote of confidence in the city's efforts to turnaround its finances since emerging from Chapter 9 in late 2014.
The deal's investment-grade credit ratings, however, were based on the state aid backing that supports the deal structure.
A double-A rated $239 million taxable series landed at spreads to comparable Treasuries of between a low of 70 basis points on a 2020 maturity to a high of 175 basis points on the 2031 maturity.
Spreads on the deal's taxable single-A rated $126 million series landed from a low of 95 basis points on the 2018 maturity to a high of 212.5 basis points on the 2032 maturity.
The high spread of 225 basis points to Treasuries was paid on the 2028 maturity in a single-A rated taxable $18 million series.
The 10-year bond in the deal's single-A rated $223 million tax-exempt series landed at 2.34% with a 5% coupon, 92 basis points over the Municipal Market Data's top-rated benchmark and 40 basis points over a comparable single-A benchmark. The long 12 year bond in the series paid a yield of 2.59% with a 5% coupon, 99 basis points over the triple-A benchmark and 42 basis points over the single-A.
"Pricing at the long end was inside of 100 basis points and that is pretty strong and it shows that there is a fair bit of faith in the state of Michigan," said Municipal Market Analytics partner Matt Fabian.
Ahead of Thursday's pricing, Fabian had expressed some concern that the state's decision to remove a state aid backing from existing Detroit Public Schools bonds and replace it with a still uncertain structure as part of a DPS overhaul could negatively impact the bonds' yields.
Fabian said generally the pricing didn't appear to reflect much investor concern about being dragged into another Detroit bankruptcy.
"The concern about the city and what they might do in a bankruptcy seems to be secondary because inside of 100 basis points doesn't imply much of a sense of foreboding," he said.
"The city is not the school district and the city has shown that at least in the first bankruptcy that this type of debt has been protected," Cure said.
The deal's list of "risk factors" begins on page 41 of the offering statement and went on for about four pages. If Detroit were to file for Chapter 9 again it could have "significant adverse consequences affecting bondholders," the document says. Those risks could include "immediately delaying for an indefinite period of time payment on the bonds, modifying the maturity date, interest and payment terms and conceivably modifying the security for the principal amount."
The deal is a trustee-managed structure. Set-aside payments for the bonds must be funded in full before Detroit can receive any state aid for operations, and all of the collections not used for debt service will remain with the trustee to fund debt service payments.
Fabian noted that pricing is reflective of investor appetite for the state of Michigan's credit, as opposed to Detroit's.
"A program like Michigan's Distributable State Aid (DSA) is what distressed or crippled governments use to get market access," said Fabian. "The city is still relying on the state and in no way is Detroit back. If these bonds were unenhanced bonds from the city it would have been a different story."
The city's underlying bond ratings remain well in junk-bond territory.
Moody's Investors Service and S&P Global Ratings last week affirmed the single-A to double-A ratings on Detroit bonds backed by distributable state aid and sold under the MFA's local government loan program. The city's DSA includes a portion of the 6% retail sales tax collected across the state.
In August 2015, in its first post-bankruptcy bond sale, the city sold $245 million of local government loan program revenue bonds through the MFA. The debt was enhanced with a statutory lien and intercept feature on the city's income taxes, which landed the deal an A rating from Standard & Poor's.
The city paid tax-exempt yields that landed 194 basis points over the MMD top-rated benchmark and 133 basis points over an A-level credit. The $110.28 million taxable series was priced about 300 basis points above comparable Treasuries.