Post Municipal Bankruptcy Steps

eBlog

December 12, 2014

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The Motor City Takes on New Debt. On its final day in municipal bankruptcy—and one day before the U.S. House of Representatives, with the White House’s blessing, voted to reverse a key provision of the Dodd-Frank law on financial swaps and derivatives which played such fundamental roles in Jefferson County and Detroit’s municipal bankruptcies, the largest in U.S. history; the Motor City issued $1.28 billion of new municipal debt in an effort to comply with financing requirements of the State of Michigan and provisions of the federal municipal bankruptcy law with regard to creditor settlements. As the remarkable Caitlin Devitt of the Bond Buyer described it: “The four separate bond financings emerged from hours of intense negotiations with creditors, bankruptcy attorneys, and restructuring consultants who didn’t always understand the nuances of municipal finance law.” Most of the bond proceeds were used to pay off creditors, with some to be dedicated to financing Detroit’s restructuring plan. The $287.5 million dollar municipal general obligation bond was the first toe in the water to test sentiment in the wake of the Motor City’s bankruptcy, so the issuance was structured in a way to try and provide greater security for the city’s bondholders than the city had done in previous issuances, with the issuance through the Michigan Finance Authority—here diverting a pledge of some of its property tax millage to a new creditor group, as per its settlement in the bankruptcy with its unlimited tax or so-called ULTGO bond holders. In a separate issuance, the Motor City did a $275 million private placement with Barclays (the only one of the four financings to generate any new revenues for the city), setting a precedent by pledging its income tax revenues as security for the municipal bonds. In addition, the city issued $632 million of limited-tax general obligation or GO bonds which are unsecured, with new interest rates and maturities, to pay off key creditor groups. The Motor City also issued $88 million in certificates of participation (COPs), with the proceeds to be used for the insurers of its COPs or certificates of participation: this debt is to be secured by a pledge of the city’s parking revenues, another first for the city. Each of the four municipal bond offerings was a private placement, placed directly with the creditors and participants; they are refundings to the extent that they replace existing bonds; however, most of the municipal bonds issued represented new credits with new interest rates, maturities, or pledges—in effect, the new Detroit’s first toe in the post-municipal bankruptcy municipal market waters. Adding to the effort—including state support—to undertake this novel financing, the city was able to add additional security through the use of two new pledges: a fourth lien on distributable state aid the Motor City receives from the State of Michigan, as well as by specific language providing that the debt millage raised for the bonds constitutes special revenues.

Testing the Water. In issuing this new debt, Detroit naturally sought feedback from the ratings agencies. In effect, the city is trying to put its toe in the water to determine whether it is safe—or at least not too costly—to return to the U.S. capital markets. It has yet to hear back from S&P, but Moody’s gave the Assured Guaranty-insured portion of the unlimited tax general obligation bonds (UTGO) an underlying rating of A3 with a stable outlook, with the agency noting its rating was based solely on the state aid lien, adding that the Michigan state intercept feature that diverts the state aid directly to the bond trustee was an important factor. The proceeds, more than a quarter of a billion dollars, will be used to pay off the banks that acted as counterparties on the city’s interest-rate swaps, finance a new information technology system, and other capital and operating upgrades as specified in the city’s approved plan of debt adjustment by U.S. Bankruptcy Judge Steven Rhodes. From the proceeds of its $632 million of limited-tax general obligation bonds, which were unsecured, the city will dedicate the proceeds to pay off various creditors: the 30-year bonds have a variable rate structure, with debt at an interest rate of 4% for the first 20 years, and 6% for the final decade. Payments will be interest-only for the first 10 years. The city will use $482 million from the proceeds of its limited tax general obligation bonds to finance the two voluntary employee beneficiary association plans which, under the court approved plan of debt adjustment, will be responsible for overseeing Detroit’s retiree health care, while a portion will be set aside to address potential unsecured creditors with various claims pending against the city. Bond insurers Syncora Guarantee Inc. and Financial Guaranty Insurance Co., holders of Detroit’s $1.5 billion in COPs or certificates of participation, will receive $98 million of the proceeds. These payments—and others—will constitute part of the payments with the two bond insurers, who were the last holdout creditors in the city’s bankruptcy.

Schooling Detroit’s Post-Bankruptcy Future. As we noted yesterday, it is difficult to imagine a significant turnaround in the Motor City’s fiscal future absent a reversal of its nearly two-thirds population decline – and any reversal is almost certain to require a very different perception of its public school system. Now an independent coalition of local business, foundation, religious and community sectors, the Coalition for the Future of Detroit Schoolchildren, has formed to look for ways to try and address—and turn around―Detroit’s long-troubled educational system. The coalition plans to meet regularly over the next 90 days to examine Detroit’s public and charter school systems as well as those operating as part of the Education Achievement Authority; it will examine how the city’s fragmented school systems impact student outcomes and efficiency in operations; it will seek to tap education experts from Detroit and across the country in identifying the best ways to improve the city’s broken education system. The leaders of the 31-member Coalition, which is scheduled to meet next week, include: Skillman Foundation President and CEO Tonya Allen; the Rev. Wendell Anthony, Fellowship Chapel and president of the Detroit branch of the NAACP; David Hecker, president of AFT Michigan/AFL-CIO; John Rakolta Jr., CEO of Walbridge Aldinger Co.; and Angela Reyes, executive director of Detroit Hispanic Development Corp. The coalition reports it plans during the next 90 days to issue its findings and make recommendations for making Detroit’s school system more equitable, accessible, and successful for all Detroit children, or, as Ms. Allen stated: “We share a common belief that Detroiters should have a say in coming up with solutions that can make Detroit schools work for kids, and that now, as the city is recovering in so many other ways, is the time to make real change happen.” The coalition’s efforts, so very critical for Detroit’s future economic revival hopes, are critical—as the term for the state-appointed emergency manager for the Detroit Public School system expires next month. Mr. Rakolta yesterday put it well: “… Detroit is on the road to economic recovery, but it won’t be a real recovery if people don’t have confidence in the city’s education system, Detroit’s vitality and global competitiveness is linked to its schools, which are educating our future workforce.”