Detroit sees little bankruptcy penalty as it sells muni bonds

Detroit News staff and wire reports
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Downtown Detroit aerial view.

Luck was on Detroit’s side when it returned to the municipal bond market.

A Treasury market rally, low supply and strong demand for high-yielding securities greeted the city when it sold $135 million of debt Tuesday, the first sale of bonds backed only by the city’s promise to repay since it filed a record-setting bankrupt five years ago. The conditions allowed Detroit to secure lower interest rates than initially expected, leaving it paying even less than some borrowers that haven’t reneged on their debts.

Bonds were priced with yields ranging from 3.36 percent on a 2020 maturity to 4.95 on those due in 2038, tighter than what was first offered. The city also was able to increase the size of the deal from $111 million to $135 million, an indication of strong demand.

“It’s a perfect recipe to come to market,” said Kathleen McNamara, senior municipal bond strategist at UBS Wealth Management. “They should be very, very happy.”

Saddled with $18 billion in debt, unable to pay its bills or provide basic services, Detroit in July 2013 was authorized by Gov. Rick Snyder to file the largest municipal bankruptcy in U.S. history. The bankruptcy was the culmination of a half-century of residential flight, a dwindling tax base, deferred investment and financial mismanagement.

The bankruptcy, like Puerto Rico’s which followed, unsettled the municipal bond market and raised the specter that governments would be punished by the market when they returned to borrow again.

But the penalty wasn’t that large. Last week, Chicago’s junk-rated school system sold 5-year bonds for a yield of 4.16 percent, or 1.95 percentage points more than what top-rated borrowers pay. Detroit’s 5-year bonds sold Tuesday for a yield of 3.91 percent, about 1.81 percentage points above the benchmark.

“From our perspective the bankruptcy penalty is pretty small to none,” said Dora Lee vice president at Belle Haven Investments, “I think that people just want yield right now and they’re hoping that they will get that with Detroit.”

“Investors obviously have short memory when they see a 5 percent yield,” McNamara said.

Nodding to the city’s improving financial reserves, Moody’s Investors Service in May announced an upgrade of the city’s issuer rating and outlook.

The rating agency attributes downtown Detroit’s surge in employment and tax revenue to the arrival of affluent residents and large-scale developments. Since 2014, Detroit’s rating has gone from B3, to Ba3 stable, which is considered a stable outlook.

Meanwhile, city officials have said Detroit posted four consecutive years of balanced budgets while crafting a plan to stave off another collapse by addressing looming pension obligations.

A surplus of $44 million was projected for the 2018 fiscal year, which ended Oct. 1, Detroit's Chief Financial Officer John Hill said in July. The city ended its 2017 fiscal year with a $53.8 million general fund operating surplus, and revenues exceeding expenditures by $108.6 million. In the 2016 fiscal year, the surplus was $63 million, and it was $71 million for 2015.

Income tax revenue increased 15 percent in the last four years, while the property tax collection rate has also climbed to more than 80 percent in fiscal year 2018 compared to 69 percent in fiscal year 2014, according to the Chief Financial Officer’s office.

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