Detroit Fallout: Muni-Bond Offerings Stall

Rick Snyder Michigan governor Kevyn Orr emergency manager detroit bankruptcy bonds
Jeff Kowalsky/Bloomberg via Getty ImagesMichigan Gov. Rick Snyder, left, and Kevyn Orr, Detroit's emergency manager.

By Patti Domm

Detroit's bankruptcy filing is making it tougher on other Michigan issuers that want to tap the muni bond market.

Saginaw County on Thursday became the third issuer to delay a multimillion dollar negotiated offering since Detroit's bankruptcy filing last month because yields on the deal would have been too high, according to reports.

The $61 million taxable bonds were rated Aa3 by Moody's and were to have funded Saginaw's pension system. Saginaw follows Genesee County and Battle Creek, Mich., which each put off deals out of concern that investors would demand higher interest rates.

The initial prices on the Saginaw bonds show they would have been high-yielding, Dow Jones reported. It said a 10-year was being offered to yield 1.7 percentage points above the 10-year Treasury, while a generic double-A might be priced to yield just 0.95 percent above Treasurys.

Saginaw was planning to offer limited tax GO pension obligation bonds and it would have been the first government to issue a bond to cover its unfunded pension liabilities under a Michigan law adopted last year, according to the Bond Buyer.

The Saginaw bonds had the double negative of being a GO associated with pension funding.

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Genesee pulled a $54 million bond deal last week, and Battle Creek put off a $16 million sale. They were both planning to issue general obligation bonds, a particular concern for the market now because of the way that Detroit's emergency manager, Kevyn Orr, is trying to treat GO bonds as unsecured debt in the bankruptcy.

If Orr succeeds, it would be a first occurrence in the $3.7 trillion muni market, and could bring into question the standing and ratings of some other GO bonds, analysts say. About 40 percent of the muni market is GO bonds, which have been viewed as sacrosanct by the market.

"There's no doubt there's this residual spillover effect from the concern about what he's trying to do," said John Donovan, senior vice president at Drexel Hamilton. "You extrapolate out from there to GO debt. It doesn't look like it yet because most people don't believe it's going to happen, including myself. But there's always risk of spillover concern with anything."

Donovan said the market is stabilizing at wider levels. Lipper reported that combined mutual fund and ETF net outflows from muni funds were just under $1 billion in the past week, less than half the amount of the prior week. It was the eleventh consecutive week of outflows.

Triple-A rated Bloomfield, Mich. and Oakland County both still plan to bring deals. Donovan said two very small Michigan municipal deals,under $10 million were also postponed. Oakland County plans to bring a $300 million deal in September, according to Bond Buyer.

The ripples from Detroit have gone beyond Michigan. "Detroit fears have added to pressure about Puerto Rico," said Blake Anderson of Mesirow Financial.

Puerto Rico's Electric Power Authority Electric Power Authority issued $673 million in debt to yield of 7.12 percent Wednesday. The bonds, maturing 2043, are rated one step above junk by Moody's and saw strong demand. "It offered up some yields that the market hasn't seen for a long time," said Donovan.

"It was an unusually high yield, which attracted a lot of mutual funds," he said. "It's a commonwealth that relies on tourism. This is an electric power authority and they have to derive revenue from people paying their electric bills."

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