Detroit’s bond offer may not have hit mark

Brian J. O’Connor
Detroit News Finance Editor
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Did Detroit’s offer to refinance 318 different classes of water and sewer bonds fall short?

Officials from the Detroit Water and Sewerage Department didn’t respond to questions after the 5 p.m. Thursday deadline, but an indication of whether the city will follow through and refinance the bonds may come at a special meeting of water commissioners Friday afternoon.

Slightly more than 28 percent of Detroit’s water and sewer bonds were tendered by bondholders before Thursday’s deadline, according to the municipal bond tracking service The bonds tendered totaled $1.5 billion of the $5.2 billion in outstanding water department debt.

In its original bankruptcy court filing on the tender offer two weeks ago, the city indicated that it had talked to large bondholders and believed enough of them would tender their shares to make the deal go through.

The city offered to refinance the bonds after negotiations with bond insurers and an ad hoc committee of bondholders as part of the city’s restructuring plan to emerge from its historic bankruptcy. Originally, the city’s proposed post-bankruptcy plan of adjustment planned to cut interest rates on the current water and sewer bonds, and gave the the city the option to redeem those bonds early, without paying additional compensation to bondholders.

The new plan would lower the water department’s costs and free up as much as $50 million from bond reserve funds. The city has the option to withdraw the tender offer if it feels too few bonds have been offered for refinancing under the tender offer.

What happens with the tender offer may also be clouded by news first reported Monday in The Detroit News of a potential deal to turn Detroit’s water department into a regional tri-county water authority. That authority would have the ability to also refinance the water system’s debt. If a deal seems imminent and the city feels that would be better than going through with the tender offer, Detroit could withdraw the offer.

The tender offer was made Aug. 7 after negotiations with insurers of the water and sewer bonds, as well as an ad hoc committee of water and sewer bondholders. According to the city’s bankruptcy court filing on the bond refinancing, it had already been in contact with large institution investors that hold water and sewer bonds, and “believes that there is sufficient interest in the tender among bondholders to achieve a successful result.”

For some bondholders, the tender offer can represent a quick profit. Some of the bonds that will pay more than 101 cents on the dollar recently traded for about 92 cents. Or, investors may be tired of the expense and effort needed to track the ups and downs of the city’s historic bankruptcy, and decide it’s best to take the money and invest it elsewhere.

If the tender offer is approved, it would move quickly, with new bonds issued around Aug. 26 and closing by Sept. 4. Besides refinancing existing bonds, the deal would also issue $190 million in new bonds to pay for capital improvements to the water system. At least some of the debt would be backed by bond insurance, which would allow the water department to tap reserve funds for the current bonds, which total as much as $50 million. That money would be used to reduce the water department’s overall debt and further lower its costs.

Whether the news of a potential regional water authority may have cooled investor interest in tendering their bonds is a matter of whether they want to choose between a concrete deal available now or a future one that may or may not come to fruition, said James Spiotto, managing director of Chapman Strategic Advisors, a municipal finance consulting firm in Chicago.

“The tender offer may give bondholders the reassurance that this can be done now, and, obviously, with any regional authority there are a lot of details to be worked out,” Spiotto says.

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