Analyst: Detroit’s Forthcoming Bond Sale Designed to Protect Investors
Detroit’s first post-bankruptcy bond issuance not reflective of market view of city, investment risk, analyst says.
UPDATE: Mayor Mike Duggan held a 3 p.m. EDT news conference to discuss the “investment grade” rating the city has received from Standard & Poor’s. Read more here.
Detroit officials are waiting for the rating for $245 million of bonds that will be re-sold on private markets next month. The bonds are part of the exit financing that was part of Detroit’s post-bankruptcy financial plan.
Barclays Capital Inc., issued the bonds last year with the understanding Detroit would re-sell them early this year. The sale was delayed until after the state passed legislation guaranteeing city income tax revenue as collateral for the bonds.
Detroit’s Financial Review Commission on Monday approved the sale, which City Finance Director John Naglick says is scheduled for Aug. 19.
Matt Fabian, a partner at Municipal Market Analytics, an independent research group in Massachusetts that covers bond market, says the rating for these bonds is not necessarily an indication of how the market views the risk associated with investing in Detroit. That’s because the bonds are designed to protect the investors who purchase them.
“Detroit accessing new capital is a positive, but you have to put that positive in context,” Fabian says. “The way that they’re borrowing, the exact security vehicle that they’re using is specifically constructed so that if Detroit files bankruptcy again investors are protected.”
Fabian says the big question about Detroit’s financial future is how any general obligation bonds would be rated because those would not be secured by city income tax revenues.
Naglick says the city has no plans for a general obligation bond sale. The Plan of Adjustment calls for a balanced budget based on existing revenue streams.
To hear the full interview with Matt Fabian, click on the link above.
