WSJ: Detroit's bonds are well-received
WSJ [[sorry for the cut-and-paste, but linking wasn't working)
Detroit Sees Big Demand in Muni Market Return
For the first time since its bankruptcy, the Motor City issues stand-alone general obligation bonds
By Gunjan Banerji
Updated Dec. 4, 2018 5:40 p.m. ET
Investors embraced Detroit’s first stand-alone bond sale since its historic bankruptcy, a sign many remain willing to lend to the city despite the lingering pain of losses from its restructuring.
The lure of higher yields from the below-investment grade debt outstripped concerns about the city’s troubled financial history, analysts said. Investors suffered losses on Detroit debt when it became the biggest U.S. city to ever file for bankruptcy in 2013.
The sale Tuesday marked the first time since bankruptcy more than five years ago that the city issued stand-alone general obligation bonds—those backed by its own full faith and credit. Those bonds hit investors with losses during Detroit’s restructuring, raising questions about the risks of what many had considered the safest form of state and local debt.
The city sold more than $130 million in debt, it said. The 20-year bonds priced at a 4.95% yield, almost 2 percentage points above average triple-A municipal debt, according to data company Refinitiv, and at least a percentage point less than city officials had initially anticipated.
The city’s five-year bonds priced with yields about 0.2 percentage point lower than five-year debt sold recently by the Chicago Board of Education, another junk-rated municipal issuer, according to Refinitiv.
In a sign of robust appetite for the debt, officials increased the size of the deal from a planned $111 million after investors initially placed orders for more than $1 billion in bonds, about 10 times what was for sale, the city said.
Detroit’s timing was also fortuitous, with steep stock declines Tuesday buoying demand for bonds. Detroit has plans to potentially sell $120 million in debt later this week, officials said. The deals come after one of its economic development authorities issued more than $300 million last week as part of a continuing effort to bolster the city’s downtown.
“It’s a good day to be in the market,” said John Hill, Detroit’s chief financial officer, in an interview. “I was really pleased with the result.”
The money from the sale is intended for infrastructure needs like parks, fire engines and transit improvements. Since Detroit exited bankruptcy in 2014, city officials have tried to rebuild downtown and lure residents, employers and trendy restaurants.
Mr. Hill said that the bonds priced with lower yields than what the city was initially expecting, and that he has been pleasantly surprised at how quickly Detroit regained access to the bond market. Finding a funding solution for its weighty pension liabilities helped, he said.
“It’s a major milestone for the city,” said Mr. Hill, who is stepping down from the CFO role at year-end. The city entered bankruptcy in 2013 after years of population declines left the automobile capital unable to pay bondholders in full or meet basic needs like operating streetlights and emergency medical services. Its downfall stunned municipal investors and changed how they and credit analysts assessed risks in the historically safe corner of the market, where defaults are rarer than in corporate debt.
In one key shift, investors realized bonds backed by a municipality’s full faith and credit weren’t as ironclad as once thought, because pensioners received priority over some bondholders in the court battle over limited government funds. Bond insurers stepped in to make some payments when Detroit didn’t. Some also said the taint of bankruptcy would throttle Detroit’s chances to borrow again and hurt municipalities throughout Michigan.
Yet the extra yield that investors demand to hold the state of Michigan’s general obligations over triple-A municipal debt has fallen since Detroit’s bankruptcy, according to Refinitiv. And Detroit’s deal Tuesday showed a city’s financial history won’t necessarily keep it from the bond market.
“People tend to have a short memory in the face of a pot of gold at the end of the rainbow. No matter how ephemeral the rainbow is,” said Nicholos Venditti, portfolio manager at Thornburg Investment Management, which oversees about $10 billion in municipal debt, said before the sale.
Detroit’s elected officials landed full control of the city’s finances in April, more than three years after the Motor City emerged from bankruptcy, marking the end of an era of state and federal oversight that began decades ago.
Though the city shed billions in long-term liabilities through restructuring and improved its finances, analysts warned that some of its challenges persist.
City officials continue to fight blight. Meanwhile, further population declines could threaten the city’s resurgence, analysts said. Detroit’s schools also have suffered financial difficulties, potentially making it harder to attract residents.
In one sign of the city’s economic fragility, General Motors Co. , one of its biggest employers, recently said it would end production at a Detroit assembly plant. The move, which could lead to more than 1,500 layoffs, shocked workers, union officials and local politicians.
Mr. Hill estimates the layoffs will cost Detroit up to $3 million in tax revenue annually but expects new businesses entering the city to recoup some of those losses.
“The biggest financial challenge for the city is obviously keeping the budget balanced on a continuing basis,” Mr. Hill said.
Last week’s sale by Detroit’s economic development authority carried insurance and an investment grade rating, but investors still demanded a yield premium to buy the bonds, Refinitiv data show.
“They are on an upswing right now but they still have a long way to go, said Craig Brandon, co-director of municipal investments at Eaton Vance. “It was really just five years ago that they were insolvent.”
