August 6, 2014 at 1:00 am

Detroit announces $5B water debt plan to free up cash for bankruptcy

The city’s water department has approved a plan to refinance almost $5.2 billion in debt, a move that could free up cash for Detroit’s restructuring and potentially speed an exit from bankruptcy court.

The plan, approved by Detroit Water and Sewerage commissioners, would lower the utility’s interest rate and slash costs. It holds the potential to save customers across the region millions of dollars.

The plan involves offering secured water bondholders a chance to have the city buy back the bonds. By doing so, the city could issue new bonds and refinance up to $5.183 billion of debt.

The amount of savings for the city depends on how many bondholders accept the offers but the maximum savings would be significantly less than $500 million, according to a person briefed on the deal.

“We think this opportunity provides benefits to the DWSD system and our customers. I am glad that we were able to work cooperatively with the State and the Emergency Manager to provide this opportunity for our bondholders,” Jim Fausone, chairman of the Board of Water Commissioners, said in a statement. “Our action today represents the first step towards a potential amicable resolution that is good for the customers, bondholders, the City, the financial industry and for the system.”

The plan was conceived following talks with federal mediators, the state, Emergency Manager Kevyn Orr, the Michigan Finance Authority, Citigroup and First Southwest Co.

“This is probably going to be successful if for no other reason that all of the behind-the-scenes negotiations got them to the point that they thought they might be successful,” said Robert Brooks, a professor of finance at the University of Alabama in Tuscaloosa.

The tender offer is expected to last until Aug. 21 — the start of a bankruptcy trial that will determine whether Detroit can implement a debt-cutting plan.

The offer is an alternative to the city’s treatment of water and sewer bonds in Detroit’s debt-cutting plan.

Under the debt-cutting plan, the city wanted to reduce the interest rate on certain bonds and eliminate a protection preventing Detroit from forcing bondholders to tender their bonds prematurely.

Details on the tender offer are still unclear. If the new offer will yield more than bondholders have been offered under the debt-cutting plan, it could be a good deal. Likewise, the tender offer might be better for investors than having the city call the old bonds early, which pays off the bonds and ends the stream of interest payments sooner than investors expect.

Or, bondholders might just want to get their money and be done with Detroit and its water department, so they can end the hassle of protracted bankruptcy negotiations and invest the cash somewhere else.

The tender offer to bondholders is optional so the success of Detroit’s plan — and potential savings — depends on market response and bondholder participation.

Staff Writer Brian O’Connor contributed.