NEW YORK (Reuters) - Detroit on Thursday sold its first general obligation bonds since exiting bankruptcy in 2014, lured back into the market to refund debt by near-record low interest rates and high demand from investors.
The city’s 10-year tax-exempt debt yielded 2.34 percent, or 0.92 of a percentage point higher than top-rated municipal bonds as measured by Municipal Market Data’s (MMD) triple A scale, according to early pricing. That was significantly better than when it sold revenue bonds nearly a year ago.
The bonds are backed by state aid, so the sale is not solely a vote of confidence in the city’s turnaround story since it exited bankruptcy in December 2014.
“Detroit would likely struggle if it were to sell bonds under its own name,” said Matt Fabian, a municipal bond analyst at Municipal Market Analytics (MMA).
Continuing caution over Detroit reflects concern that while the city is heading in the right direction its financial condition is still tenuous. Some fear the city could declare bankruptcy again, possibly within 10 years, with an even more painful outcome for investors than before, Fabian said.
The city sold a total of $608.9 million in bonds, issuing $223.8 million in tax-exempt securities, according to preliminary data. The amounts and yields could change in final pricing, expected later on Thursday.
“We experienced broad and deep investor participation and the savings certainly (significantly) exceeded our expectations,” Detroit’s finance chief John Naglick said in emailed comments. “Clearly the financial community has expressed confidence in the city.”
Even though the deal is backed by state funds, tighter spreads highlight demand for tax-free debt and investors’ “reach for yield” in the current near-record low interest rate environment.
“This is probably the best time ever to be a bond seller,” said Fabian. “It’s not that investors are stretching for yield, investors are stretching just to remain invested.”
In its first post-bankruptcy public debt offering last August, the city restructured $245 million of variable-rate revenue bonds backed by city income taxes into a fixed-rate mode at a hefty spread over top-rated bonds.
In that sale, tax-exempt bonds totaling $134.7 million were priced at par with a top yield of 4.50 percent in 2029. That resulted in a spread over Municipal Market Data’s benchmark yield scale for top-rated bonds of 194 basis points.
Detroit shed about $7 billion of its $18 billion of debt and obligations in the biggest-ever U.S. municipal bankruptcy.
Our Standards: The Thomson Reuters Trust Principles.