New bond issues signal a return of investor confidence in Detroit
The news was bright Thursday on Detroit’s ability to borrow money:
■The post-bankruptcy financial picture got a little brighter as the city finalized a deal to borrow $275 million in new bonds.
■In addition, a new issue of nearly $1.8 billion in water and sewer bonds scheduled to close next week gathered $7.6 billion in orders, with two credit agencies upgrading Detroit water bonds to investment grade.
■Finally, a new state bond issue on behalf of Detroit schools also got a higher rating and was well received.
The moves all signal greater investor confidence in Detroit’s financial future.
When city declared its historic Chapter 9 bankruptcy would include the Detroit Water and Sewerage Department, ratings agency downgraded the state of water and sewer bonds to junk status. That meant they were considered risky, and thusly unpurchaseable by many big institutional investors.
As a result of those moves, the city will refinance its old bonds with a new $1.8 billion bond sale, and Standard & Poor’s has rated the new bonds “BBB+” while also raising its rating on many of the old water bonds. Those that weren’t offered as part of the city’s recent tender deal will also be rated “BBB+,” which is S&P’s lowest investment-grade rank. Those bonds tendered at less than the face value will be considered impaired and, when the new bond deal is finalized, will drop to “D,” the lowest.
The Fitch ratings service said it would rate some of the new bonds as investment grade, but give the less-senior bonds a non-investment grade rating. Moody’s Investors Service is rating all of the new bonds at less than investment grade.
Refinancing the old water bonds with new is estimated to save the water department more than $107 million in today’s dollars over the life of the bonds.
The new financing for the city will be issued through the Michigan Finance Authority. The $275 million financing deal with Barclays Capital Inc. will allow the city to pay off a $120 million loan from Barclays that financed “quality of life” improvements to city services. It also will allow Detroit to pay $45 million toward a settlement of a troubled pension-related debt with two banks, and potentially $55 million toward limited-tax general obligation bondholders.
Also on Thursday, the state announced the sale of nearly $108 million in state aid revenue notes for Detroit Public Schools. The short-term debt got the highest rating from S&P — “SP-1” — with a final interest rate of 2.85 percent, well below the 4.375 percent the state paid on last year’s school aid notes.
The new water bonds are set to close by Sept. 4. No ratings or closing have been announced for the Barclay’s bonds.
Staff Writer Robert Snell contributed.