Detroit and the Michigan Department of Treasury last week completed a deal to refinance bonds issued as part of the city’s exit from bankruptcy.
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The Michigan Department of Treasury this month offered the city of Detroit a $79.51 million deal to repay debt issued to pay creditors in connection with a bankruptcy settlement.
Wells Fargo set the purchase price on October 8th.
Series 2024A Municipal Loan Program Revenue Bonds are limited obligations of the authority backed by the city’s share of annually distributable state grants deposited with the bond trustee by the state treasurer. These are also supported by the City’s General Obligation Limited Tax Pledge.
Thanks to the state aid intercept, the bond has an Aa2 rating from Moody’s Ratings and an AA-minus rating from S&P Global Ratings.
The deal has a 5% coupon expiring in November 2025 with a yield of 2.9% and a 5% coupon in 2029 with a yield of 2.66%.
The City of Detroit’s bond law advisors are Miller, Canfield, Paddock, and Stone. The bond advisor to the Michigan Department of Treasury is Dickinson Wright PLLC. The city’s advisor is Public Resources Advisory Group, Inc.
Moody’s said in its ratings lawsuit that its ratings reflect the strength of Detroit’s distributable state aid intercept program.
“Across the five liens in fiscal 2023, promised returns amount to just over 3x and are likely to exceed 3x even with new issuance,” the rating agency said.
Distributions under this program include a mix of constitutional and statutory payments. While Moody’s notes that the statutory payments can and have been reduced, it expects that starting in 2024, the constitutional payments alone will provide sufficient compensation for all five liens. He said there was.
The rating agency also entered into an intercept agreement that requires the state treasurer to deposit all authorized state aid funds available for allocation directly to a third-party trustee in order for the City of Detroit to meet its debt service requirements. He also mentioned that it is being separated from the city budget.
This is the structure the city used to gain market access during the difficult years before and immediately after the historic Chapter 9 bankruptcy.
In the years that followed, the city of Detroit also entered the municipal bond market with its own credit, without the state’s backstop.
The firm has maintained stable market access since selling its first general debt transaction in 2018, and its efforts culminated in upgrades to investment grade from both S&P and Moody’s earlier this year. .
S&P said in its rating report that the state’s bond rating is one notch below the state’s GO rating of AA because the credit risk of debt backed by intercept and withholding programs is related to the state’s creditworthiness. It said the outlook was stable.
S&P’s AA negative rating also reflects strong state and agency oversight and healthy pledged revenue in the form of all distributable state grants earmarked in the state budget for distribution to cities. Masu.
S&P Director Randy Layman said DSA commitments have important structural and fiduciary features that allow state treasurers to advance appropriated DSA allocations as necessary to meet future obligations; He said the bond is also secured by the city of Detroit’s LTGO pledge.
“A withholding mechanism for distributable state aid will help ensure that revenue can be used to service debt,” Reiman said. “These funds will not be released for Detroit’s purposes until the appropriate amount of debt service is completed.”
Layman also noted that there is “significant scope” for statutory distributions to be reduced without affecting required obligations.
Proceeds from this transaction will reimburse outstanding fiscal rehabilitation income tax revenues and issuance costs of redeemable bonds, Series 2014A, and 2024 municipal bonds.
According to an official statement, the 2014 bonds were issued “to satisfy certain claims of unsecured creditors as set forth in the Adjustment and Confirmation Order Plan” that released the city of Detroit from Chapter 9 bankruptcy.
They will be held in escrow until Jan. 17, the option redemption date for the 2014 notes, according to an official statement.
According to a bond authorization resolution adopted by the Detroit City Council on July 30, the goal of the refinancing is to achieve net present value savings of $134,725,000 on Series 2014A bonds issued in December 2014. It is said that
The resolution authorized up to $100 million in refinancing bonds to be sold to the Michigan Department of Treasury through a negotiated sale.
