Detroit $5.5 bln bond sale readied as bond tender looms

Wed Aug 20, 2014 12:25pm EDT

Aug 20 (Reuters) - Underwriters for up to $5.5 billion of Detroit water and sewer revenue bonds released preliminary sale documents for the deals late on Tuesday as a tender offer for existing bonds continues.

If enough bonds are tendered by 5 p.m. EDT (2100 GMT) on Thursday and sufficient savings are projected, the refunding bonds could be sold in two issues through the Michigan Finance Authority with Citigroup as the lead underwriter. As an alternative, the bonds could be privately placed with Citigroup and other financial institutions.

Bill Nowling, a spokesman for Detroit Emergency Manager Kevyn Orr, said on Tuesday a determination on how the bonds will be sold would be made next week. With a public sale, the bonds could be sold next week with the deals closing around Sept. 4, he added.

The deals, which the Detroit City Council approved last week, would still need approval from the Detroit Board of Water Commissioners at its meeting on Friday. U.S. Judge Steven Rhodes, who is overseeing the city's historic bankruptcy case, also needs to sign off on the bond sales to raise money to pay for the tendered bonds and provide new money for the utility.

In a report this week, Janney Capital Markets said that in some instances, the tender price Detroit is offering to existing water and sewer bondholders "is well below recent trading levels."

The credit ratings on current water and sewer bonds were dropped into the junk category as Detroit's bankruptcy case progressed.

According to the preliminary official statements, the senior and second lien bonds will be structured with serial and term bonds with yet-to-be determined maturities. The bonds are payable with net water and sewer revenue, and payments on some of the bonds will be guaranteed by a bond insurance company. Assured Guaranty would insure the deals' reserve accounts.

The statements warn potential investors that the city's exit from the biggest-ever municipal bankruptcy will be determined by a lengthy court hearing set to begin Aug. 29 on Detroit's debt adjustment plan. They also note Detroit could file for bankruptcy again in the future, subjecting the bonds to extraordinary optional redemption.

The documents also acknowledge that future governance of the water and sewer department, which serves dozens of Michigan communities outside of Detroit, remains up in the air. Options under discussion are private management and a regional authority.

As part of Detroit's plan to adjust $18 billion of debt and other obligations, the city has proposed tapping $408.6 million from the department over nine years to cover payments to the Detroit General Retirement System accrued through June 30. Three Michigan counties served by the water and sewer system object to the revenue diversion. (Reporting by Karen Pierog, editing by G Crosse)

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