Bond sale to boost Detroit cash flow set for Thursday
Aug 10 (Reuters) - A nearly $123 million bond sale to boost Detroit's cash flow will finally hit the U.S. municipal bond market on Th ursday after being delayed by litigation, a Michigan official said on Fri day.
The local government loan program revenue bonds will be sold through the Michigan Finance Authority, with $76 million of the proceeds earmarked to pay off an interim borrowing that was privately placed with Bank of American Merrill Lynch in March.
The previous borrowing and the upcoming bond issue will raise $137 million for the city by restructuring outstanding debt and selling new bonds to cover the city's fiscal 2012 and 2013 self-insurance payments, according to Michigan Deputy Treasurer Tom Saxton.
While credit rating agencies have pounded Detroit's already low ratings deeper into the junk category due to a myriad of fiscal and political problems, the bonds carry investment grade ratings of A3 from Moody's Investors Service and A-plus from Standard & Poor's Ratings Services.
The key security for the bonds, which carry Detroit's limited-tax general obligation pledge, is that they will be paid off with the city's state revenue-sharing money. Those funds will be sent directly from the state to the bond trustee to cover debt service.
"That should provide some comfort to investors," Saxton said.
Detroit issued about $350 million of senior and second lien bonds in 2010 also secured by state revenue-sharing payments. Annual debt service on those bonds, along with the new third lien bonds, totals $40 million, according to Saxton. Detroit's revenue-sharing payments, which were nearly $334 million in fiscal 2001, have fallen since then, with the fiscal 2013 payment estimated at $173.8 million, according to the deal's preliminary official statement.
The deal, which will be priced through Bank of America Merrill Lynch, is structured with serial maturities from 2014 through 2032.
The bond sale has been on a bumpy ride since it surfaced earlier this year as Detroit was on the brink of running out of cash and the city eventually entered into a financial stability agreement that gave the state more oversight of its finances.
State officials had wanted to sell the long-term bonds by the end of June to pay off the interim debt and avoid diverting $28.5 million in revenue sharing from the city for a debt service payment. However, a challenge to Detroit's financial stability agreement launched by the city's top lawyer derailed the plan, although BofA Merrill Lynch agreed in early July to extend the deadline to retire the interim debt to Aug. 15.
The turmoil caused by Detroit Corporation Counsel Krystal Crittendon's lawsuit, which was ultimately dismissed by a state judge, and fears that the delay in selling the long-term bonds would force the cash-strapped city to miss a payment on its pension debt, led to a round of rating downgrades in June.
Detroit Mayor Dave Bing has said the delay also increased the city's borrowing costs on the interim bonds by an additional $10,000 a day.
A population plunge and sinking revenue have left Detroit with a $260 million cumulative budget deficit and a huge $7.9 billion long-term debt burden that includes bonds, employee pensions and retiree healthcare liabilities.