Abayomi Azikiwe of the Moritorium Now Coalition talks with protestors gathered outside of the Coleman A. Young Municipal Center in downtown Detroit on Friday July 26, 2013 while opposing to pension cuts. , a photo by Pan-African News Wire File Photos on Flickr.
August 9, 2013 at 8:08 am
Detroit bankruptcy filing stymies municipal bond sales
David Shepardson and Chad Livengood
Detroit's bankruptcy filing has prompted bond sale delays in Saginaw County, Battle Creek and Genesee County,
A third Michigan local government has postponed a bond sale, amid concerns Detroit’s bankruptcy filing will change the rules of the municipal bond game and make it more expensive for communities to borrow money.
Saginaw County, with 198,353 residents in mid-Michigan, delayed a $60.5 million pension bond sale on Thursday because investors were seeking higher interest rates. Genesee County — home to Flint — last week put off a $54 million water and sewage bond sale, citing poor investor interest. And the city of Battle Creek this week delayed a $16 million general obligation bond issue.
The bond market is concerned that Detroit’s bankruptcy will set a precedent in treating bond investors the same as other unsecured creditors, rather than giving them priority over unsecured debt, such as pensions.
“This is kind of what we’re going to be dealing with for a while because it’s unchartered territory,” said Anthony Minghine, associate executive director of the Michigan Municipal League. “Generally, when the market’s uncertain, they put a premium on it.”
Saginaw County’s sale of bonds to prop up its struggling pension fund following Detroit’s bankruptcy filing was predicated, in part, on $3.5 billion in pension debt that may have added to its costs to borrow, Minghine said. “Is that a debt you might want to put out in the market this week? Maybe not,” he said.
Still, Saginaw’s planned debt offering was rated Aa3 — fourth-highest credit rating issued by Moody’s Investor Service.
A spokeswoman for Gov. Rick Snyder, Sara Wurfel, said Detroit’s bankruptcy filing shouldn’t effect Michigan cities and counties seeking to raise money.
“We acknowledge there are concerns out there, though this kind of bond timing generally happens on a regular basis anyway and ultimately it should all work out,” she said. “These are and should be separate issues. Detroit is an incredibly unique situation and we believe rating agencies should look at each entity individually and judge them on their own credit rating and history.”
Reuters news service, meanwhile, reported the Michigan Finance Authority is planning to sell $18 million in bonds next week for Ypsilanti Community Schools. And according to The Wall Street Journal, there have been just three small bond municipal bond offerings in Michigan since Detroit’s bankruptcy filing: Ypsilanti sold $7.5 million in bonds, Portage sold $3.1 million and Wyoming Public Schools sold $2.1 million
Detroit has about $530 million in general obligation bonds and is seeking to treat bond holders as unsecured creditors. Orr has offered unsecured creditors, including pension recipients, a $2 billion note in exchange for $11.5 billion in claims.
“It isn’t that these (other) cities cannot access the market; it’s that they don’t want to pay the interest rate that the market is charging them,” said Matt Fabian, managing director of Municipal Market Advisors, a Concord, Mass., firm that researches the bond market. “If other cities and counties concede and agree to borrow higher interest rates, then they can borrow. The market isn’t closed to them.”
Fabian said he’s surprised at how investors are pushing back against buying municipal bonds in Michigan: “It’s remarkable that the market is showing this kind of discipline with these three (Michigan municipalities).”
Other headwinds for bonds
It’s not just Detroit’s problems that are causing trepidation in the bond market. The U.S. bond market as a whole has been shaky because of predictions of rising interest rates, which makes existing bonds less desirable.
Tom Doe, CEO at Municipal Market Advisors, notes that with overall interest rates forecast to rise after the Federal Reserve slows down its bond-buying program, investors have been pulling money out of bond mutual funds, looking for better yields in stocks or other alternatives.
“With so many bonds being sold by mutual funds, it creates a lot of alternative securities for investors, which may be more desirable than the guilt-by-association of Michigan,” Doe said.
In addition, smaller municipal bond offerings, such as Saginaw’s $61 million deal, have been attractive investments for the past few years to regional banks, which have been taking in more deposits than they’ve loaned out. But with banks starting to make more loans, those buyers are skipping bond offerings. “The municipal bond purchases by banks in the second quarter is about 50 percent this year compared with what it was last year,” Doe said.
Still, Oakland County, which has a AAA credit rating, is planning to go to the market in September to raise more than $300 million to refinance existing debt, a spokesman said.
General obligation bonds traditionally have been viewed as safe investments because cities pledge to raise taxes to pay the debt, if necessary. Detroit Emergency Manager Kevyn Orr, however, has said Detroit has hit its statutory limit for property taxes and that investors should have known the Motor City was teetering on the verge of insolvency.
Detroit may set a precedent
Some analysts think Detroit’s bankruptcy could damage the nation’s $3.7 trillion municipal bond market.
“Detroit’s case has the potential to set court precedents,” BlackRock, the world’s largest asset manager, said in a note to investors last month. “This filing will be the first major case in which general obligations bonds are likely to be challenged. GOs (general obligations) heretofore were deemed by municipalities and their lenders to be of higher priority than other obligations, such as pension benefits and (retiree health care).”
Wurfel noted that Michigan has 651 counties and cities. “According to a recent S&P analysis, only two of those aren’t investment-grade. There continues to be an abundance of sound, smart investments to make in Michigan and our local communities.”
She said Snyder has taken steps to assure Wall Street that the concern should be limited to Detroit. “We’re also in regular contact with rating agencies outlining what Michigan is doing and why,” she said.
DShepardson@detroitnews.com
From The Detroit News: http://www.detroitnews.com/article/20130809/BIZ/308090037#ixzz2bTu0Em00
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