In shadow of Detroit, a Michigan county delays bond sale

Detroit Thu Aug 8, 2013 7:17pm EDT

A 'Welcome to Detroit' border sign is seen as traffic enters Detroit, Michigan August 3, 2013. Picture taken August 3, 2013. REUTERS/Rebecca Cook

A 'Welcome to Detroit' border sign is seen as traffic enters Detroit, Michigan August 3, 2013. Picture taken August 3, 2013.

Credit: Reuters/Rebecca Cook

Related Topics

Detroit (Reuters) - Michigan's Saginaw County on Thursday postponed a $60.55 million pension obligation bond sale, the latest sign of how Detroit's bankruptcy filing is affecting access to the municipal bond market by other localities in the state.

"The deal has been postponed and no further information about the postponement is available at this time," said Larry Magnesen, director of corporate communications for Fifth Third Bancorp, the lead manager for the deal.

Officials of Saginaw County, which has a population of about 200,000 and is about 100 miles north of Detroit, were not immediately available to comment.

Saginaw County was the third locality in Michigan to postpone a bond sale since Detroit filed for Chapter 9 bankruptcy protection on July 18.

"This trend is something we are watching," said Robert Amodeo, portfolio manager at Western Asset. "It is worrisome. We have to wait and see if this will also happen to larger issuers when they come to the market"

"For small issuers, the trend is likely to continue because people do not have the interest or the ability to conduct a credit analysis," Amodeo said.

Michigan Gov. Rick Snyder's office said 651 local communities in the state have bond ratings, and only two of them are not investment grade.

Sara Wurful, spokeswoman for the governor, said that Snyder's office acknowledges "there are concerns out there, though this kind of bond timing generally happens on a regular basis anyway and ultimately it should all work out."

Wurfel said Detroit's situation is unique, and she pointed out that the municipal bond market is also pressured by concerns that the Federal Reserve will soon end its monetary stimulus program, which would likely hurt bond prices.

An S&P Dow Jones Indices research note issued on Thursday said that Detroit's bankruptcy filing has cost the municipal bond market $13.8 billion in the last three weeks.

The Saginaw deal is rated Aa3 by Moody's Investors service. According to preliminary indication of interest, the taxable bonds were pricing at around 170 basis points over 10-year U.S. Treasury notes.

In a comparable sale in mid-May, Michigan's South Lyon Community School District sold $55.57 million of taxable unlimited general obligation bonds at 110 basis points over 10-year Treasuries.

The credit spread for Michigan's 10-year general obligation bonds stands at 41 basis points over the market's benchmark yield scale for triple-A-rated debt, indicating that investors are demanding a higher yield to own the debt. Since the beginning of the year it had been at 35 basis points over Municipal Market Data's scale for 30 weeks.

There have been no new bonds sales from Michigan issuers on the U.S. municipal bond market for an amount greater than $7 million since Detroit filed for bankruptcy protection.

OAKLAND COUNTY IN SEPTEMBER

Analysts said Detroit's impact on the state is clear.

"I know the governor said there are a lot of good bonds and good cities in Michigan and that is true, but there are also a lot of bonds and a lot of good cities in the country and they do not have the mess that became Detroit," said Richard Larkin, director of credit analysis at HJ Sims. "Investors have plenty of fish in the sea to choose from, so why bother fishing in lake Michigan?"

Daniel Berger, analyst at Municipal Market Data, said Detroit's decision to seek bankruptcy protection stands in contrast to how other cities have coped with massive debt problems. "Detroit has been different, and investors feel skittish for any local government," he said.

But the emergency manager for Detroit, which is still awaiting a court ruling on its eligibility for protection from creditors, said he simply cannot worry about any broader impact.

"I'm a fiduciary for this city," Kevyn Orr, the emergency manager, told Reuters on Wednesday. "I cannot be concerned about what dreams may come from the result of what we do."

Other Michigan localities to put off bond sales recently include the city of Battle Creek and Genesee County.

Battle Creek, which is located about 120 miles west of Detroit and nicknamed Cereal City because it is home to the Kellogg Co headquarters, decided on Monday to delay until mid-September a $16 million bond sale that had been set for next week.

"We don't necessarily want to be the first ones out the door with a bond issue after the Detroit bankruptcy and with the market doing the volatile things that it's doing," Linda Morrison, the city's finance director, said on Wednesday. "We'd rather wait and see."

The third locality, Genesee County, about 70 miles north of Detroit, last week held off offering a $54 million water and sewage bond because of low investor interest, according to media reports.

SALES ON TAP

Still, some Michigan municipalities are forging ahead with plans to issue bonds.

The Michigan Finance Authority is planning to sell $18.1 million of revenue bonds on August 14 for Ypsilanti Community Schools, a market source said on Thursday.

The Michigan Strategic Fund will offer $11.9 million of limited obligation revenue bonds for the Methodist Retirement Communities Inc. on either Tuesday or Wednesday next week.

Oakland County, which borders Detroit to the north, is going ahead with plans to issue up to $340 million in taxable bonds to refinance a 2007 deal to pay off other post-employment benefits liabilities, Bob Daddow, the deputy county executive, said on Thursday. The sale is slated for the third week of September.

The county, which has a AAA bond rating, is financially strong, and Daddow said he does not think buyers will shy away from the bonds.

"We are not Detroit," he said.

(Additional reporting by Caryn Trokie and Tiziana Barghini in New York and Bernie Woodall in Detroit; Editing by Leslie Adler, Dan Grebler and Ken Wills)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (5)
Handbook wrote:
When are folks going to wise up that Detroit’s problems are occurring throughout the country. The cops, firemen and other government workers are paying off corrupt politicians to give them the “kitchen sink”. Taxes will continue to climb until the ship gets top heavy and rolls over.

Aug 08, 2013 7:02pm EDT  --  Report as abuse
Handbook wrote:
When are folks going to wise up that Detroit’s problems are occurring throughout the country. The cops, firemen and other government workers are paying off corrupt politicians to give them the “kitchen sink”. Taxes will continue to climb until the ship gets top heavy and rolls over.

Aug 08, 2013 7:02pm EDT  --  Report as abuse
TheNewWorld wrote:
@Handbook

What we are seeing has been 20-40 years in the making. I remember when West Virginia Governor Rockefeller (who became Senator) made West Virginia teacher some of the highest paid teachers in the country. They said they had to because of the competition of Ohio and Virginia. The problem is, the income of West Virginia is much lower than Ohio or Virginia. He is long gone, and those debts are just now starting to show up.

It is quite a diabolical set up. Even FDR was against public service unions. Union votes you in office, you give the unions a golden retirement package, you don’t have to worry about these promises for the next couple of decades, everyone is happy.

Twenty years later neither the politician or the union reps are around, they are both retired on the benefits they set up for themselves 20 years later, and the current citizens get to pay for it all. At that point they have to chose between cutting public service jobs, raising taxes, or go bankrupt. So every one loses except the retired public service officials.

I find it revolting, and I hope that every single one of them loses their retirement benefits in full. I want every public service worker to have to invest in a 401k like the rest of the private sector. I know some people will think it is cruel to revoke their retirement benefits, I think it is a fair trade off to not putting their collective bargaining rears in jail for the rest of their life for extorting money from the public at large. They make Madoff look like a boy scout in my opinion.

Aug 08, 2013 7:24pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.