Wayne County, Michigan, marked a milestone in its fiscal recovery as it came to the market this week with a $289 million, state-enhanced issue that was oversubscribed.
The deal to finance the Charter County of Wayne Criminal Justice Center came after an eight-year absence from the long-term market, during which the county lost its investment grade status and narrowly avoided bankruptcy. County Executive Warren Evans then entered a state consent agreement in 2015. The agreement paved the way for the county to trim costs, make headway on its pension burden, and rebuild reserves.
All maturities of the senior lien distributable state aid revenue bonds were at least one times oversubscribed with some as many as eight times, said Wayne County chief financial officer Henry Dachowitz. Some market participants say in typical transactions that signals the underwriting team should have come with a more aggressive scale, but Dachowitz said this was no ordinary deal.
“We had a tough issue and we did not want to be unduly aggressive. We came out with a price that we thought was at market for this deal. We haven’t been in the market in eight years. Detroit went bankrupt and we avoided it but were under state supervision,” Dachowitz said.
“We wanted to price it in a way to get the engagement and interest from investors. Our danger was not having the interest and engagement” if the scale was too aggressive, he added. “It was our strategy.” The county held meetings with investors in Boston, Chicago, and New York ahead of the sale.
Much of the deal sold at a premium to raise the $315 million in proceeds needed to finance the county’s share of the $380 million facility in Detroit. Goldman Sachs priced the bonds on Wednesday with the Michigan Finance Authority serving as issuer.
The paper carried a Aa3 from Moody’s Investors Service due to a state intercept and most spreads landed nearly on par with a single A on the Municipal Market Data’s scale. The true interest cost was 3.91%.
The deal’s 10-year paid a yield of 2.91%, a 42 basis point spread to the AAA, while the 25-year bond landed at 3.54%, a 51 basis point spread to the AAA. Most of the deal offered 5% coupons.
The underwriting team — with Dachowitz’s blessing — shifted the final 30-year maturity that priced at a 92 basis point spread to a 4% coupon from a 5% one, which impacts the yield to maturity and yield to call. Strong demand allowed the county to lower the premium and sell the maturity at par.
A trader said the higher yields associated with the 4% coupon offers a 20- to 30-basis point yield kick that is appealing especially for retail.
One Chicago-based trader said the combination of the state backing and the extra yield lured buyers. “With the state intercept you get more comfortable and you can put the paper in a high grade, double-A account, but it carries the extra yield of a lower-rated credit,” said the trader. Market perception is also that the county’s credit is on the upswing, so there’s less worry about bonds losing value.
The county exited state oversight in 2016 and a series of upgrades has restored its investment grade ratings. It has been in junk since 2015.
The county still has room to use the intercept pledge as its $51 million of pledged aid revenue provides 2.7 times debt service coverage, but Dachowitz said the county needs to stay on an upward fiscal path as eventually the coverage ratios will be diminished and the county will need to borrow on its own.
The county leaned toward the conservative in the repayment structure. Debt service is level with no balloon payments and it did not capitalize interest, although it is delaying principal repayment during the first four years when construction is underway. “It sends a signal to rating agencies and investors” that the county isn’t risking its fiscal progress, said Dachowitz, who took the job six months ago.
The county came to market after a federal judge refused to block the sale. An eleventh-hour lawsuit accuses the county of failing to property notify residents of its intent to sell the bonds.
The county benefited from June upgrades. S&P Global Ratings boosted the county’s general obligation rating to BBB-plus from BBB-minus and assigned a positive outlook and Moody’s raised the rating two notches to Baa2 restoring its investment grade.
The bond sale also marked a turnaround for a troubled project and previous sale.
In 2010, the county issued $200 million of bonds, secured by its limited-tax GO backing, for a new jail on Gratiot Avenue in downtown Detroit. The county halted construction of the jail in 2013 after having spent $157 million and the deal came under Internal Revenue Service scrutiny.
It later scrapped plans for completing the jail at the Gratiot site and entered into an agreement with Rock Ventures, the vehicle for Quicken Loans Founder Dan Gilbert’s numerous Detroit real estate ventures.