Detroit says investor demand for water/sewer bonds is big

Wed Aug 27, 2014 1:44pm EDT

Aug 27 (Reuters) - Detroit's sale on Tuesday of nearly $1.8 billion of water and sewer bonds attracted about $7.6 billion in orders and will save the bankrupt city nearly $250 million, city officials said on Wednesday.

The bonds, issued through the Michigan Finance Authority and priced in the municipal market by senior underwriter Citigroup Inc, raised funds to repurchase about $1.5 billion of existing water and sewer bonds returned by investors under the city's tender offer, which expired last Thursday.

The tender offer was aimed at replacing some of the $5.2 billion of existing revenue debt with lower-cost bonds.

Detroit reported a $113.5 million or 6.6 percent net present value savings on the $1.64 billion refinancing portion of the two bond issues, as well as a projected net cash flow savings over the life of the bonds of $249 million. The city also raised about $150 million to finance sewer-system improvements.

Nicolette Bateson, chief financial officer of the Detroit Water and Sewerage Department, said the four times over subscription for the bonds enabled underwriters to lower yields during a repricing.

She added that the deals attracted 64 different institutional buyers and a small amount of participation from retail investors. Some of the buyers were investors that had tendered bonds, according to the city.

Detroit launched the tender offer on Aug. 7 after most water and sewer bondholders rejected the city's debt adjustment plan in voting earlier this summer.

In the absence of the tender, call protection would have been eliminated or interest rates would have been reduced on "impaired" outstanding water and sewer bonds under Detroit's plan. Those bonds make up about $2.2 billion of the $5.2 billion of existing debt.

If the refinancing deals close as expected on Sept. 4, bonds that were not tendered will be paid under current terms.

Detroit, which filed the biggest-ever municipal bankruptcy in July 2013, faces a key hearing that begins next Tuesday to determine if its debt adjustment plan is fair and feasible.

Its treatment of bonds in the bankruptcy, which has included defaults, roiled the muni market and pushed the city's bond ratings deep into "junk" territory.

Ratings for the refunding bonds were raised with some still in the "junk" category and some investment grade. Some of the senior and second lien bonds priced on Tuesday were insured by Assured Guaranty Municipal Corp or National Public Finance Guarantee Corp, lifting their ratings well into the investment grade category.

Daniel Berger, senior market strategist at Municipal Market Data, said spreads on the city's water and sewer debt had tightened considerably over the past few months.

"I think it's just a quest for yield," he said, regarding the big demand on Tuesday for the debt.

Yields on tax-exempt bonds in the deals topped out in the high 4 percent to low 5 percent levels with mostly 5 percent coupons. The longest maturity was in 2044.

(Reporting by Karen Pierog in Chicago; editing by Matthew Lewis)

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