Detroit refinances some bonds issued for bankruptcy exit

Bloomberg News

The Michigan Finance Authority this month priced for the city of Detroit a $79.51 million deal to refund debt issued to pay creditors in connection with its bankruptcy settlement.

Wells Fargo priced the deal Oct. 8.

The Series 2024A local government loan program revenue bonds are limited obligations of the authority backed by the city’s share of annual distributable state aid deposited with the bond trustee by the state treasurer. They’re also backed by the general obligation limited tax pledge of the city.

On the strength of the state aid intercept, the bonds carry ratings of Aa2 from Moody’s Ratings and AA-minus from S&P Global Ratings.

The deal priced with 5% coupons maturing in November 2025 yielding 2.9% and 5s of 2029 at 2.66%.

Bond counsel to the city of Detroit is Miller, Canfield, Paddock and Stone. Bond counsel to the Michigan Finance Authority is Dickinson Wright PLLC. The municipal advisor is Public Resources Advisory Group, Inc.

Moody’s said in a rating action that its rating reflects the strength of Detroit’s Distributable State Aid Intercept Program. 

“Pledged revenue provided a little over 3x coverage across all five liens in fiscal 2023 and will likely remain over 3x even with the new issuance,” the rating agency said.

Distributions under the program include a mix of constitutional and statutory payments. While Moody’s noted that statutory payments can be and have been lowered, it said it anticipates that constitutional payments alone will provide sum-sufficient coverage for all five liens beginning fiscal 2024.

The rating agency also noted that Detroit has an intercept agreement that obligates the state treasurer to directly deposit all authorized distributable state aid payments to a third-party trustee to satisfy debt service requirements, insulating them from the city’s budget.

It’s a structure the city used before its historic Chapter 9 bankruptcy and immediately afterward to gain access to the market.

In the ensuing years, Detroit has also entered the municipal bond market on the back of its own credit, without a state backstop.

It’s had steady market access since 2018, when it sold its first such general obligation deal, a journey that culminated with upgrades from both S&P and Moody’s.

S&P said in its rating report that the credit risk of debt supported by intercept or withholding programs is linked to the state’s creditworthiness, so its rating on the bonds is one notch lower than the state’s GO rating of AA with a stable outlook.

S&P’s AA-minus rating also reflects strong state and authority oversight and healthy pledged revenue in the form of all distributable state aid appropriated and allocated in the state budget for distribution to the city.

S&P Director Randy Layman said the DSA pledge has key structural and credit features, including that appropriated DSA allocations can be advanced by the state treasurer if needed to meet upcoming obligations, and the bonds are also secured by Detroit’s LTGO pledge.

“The distributable state aid withholding mechanism helps ensure that revenues will be available to meet debt service payments,” said Layman. “These funds are not released for Detroit’s purposes unless set-asides equivalent to debt service payments are complete.”

Layman also noted “there is a fairly large margin” by which statutory distributions can decline without the required obligations taking a hit.