Michigan Sales Slow Most Since April After Detroit: Muni Credit

Photographer: Jeff Kowalsky/Bloomberg

The move by Detroit, which Republican Governor Rick Snyder backed, is clouding investors' view of Michigan even as the state's economy is strengthening, leaving it poised for higher credit ratings. Close

The move by Detroit, which Republican Governor Rick Snyder backed, is clouding... Read More

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Photographer: Jeff Kowalsky/Bloomberg

The move by Detroit, which Republican Governor Rick Snyder backed, is clouding investors' view of Michigan even as the state's economy is strengthening, leaving it poised for higher credit ratings.

Michigan municipalities are set to borrow the least in three months as Detroit’s bankruptcy shakes investor confidence, exacerbating the steepest borrowing slowdown this year among the 10 most populous states.

Governments in the state, including school and water districts and the city of Portage west of Detroit, plan to offer about $13 million of debt this week. It’s the least since April for a non-holiday week and about 10 percent of the same period of 2012, data compiled by Bloomberg show.

Localities are pulling back as investors, including Nuveen Asset Management, question the value of a general-obligation pledge from borrowers in the eighth-largest state by population. Buyers may demand extra yield from Michigan issuers after Detroit’s decision, said Jim D’Arcy, who helps oversee about $48 billion of munis at Vanguard Group Inc.

In particular for cities around Detroit, “the guilt-by-association factor is going to start to creep in to the deal because Michigan will have more of a taint on it now,” said Patrick Morrissey, who helps manage about $3 billion in fixed income at Great Lakes Advisors in Chicago.

Clouded View

The move by Detroit, which Republican Governor Rick Snyder backed, is clouding investors’ view of Michigan even as the state’s economy is strengthening, leaving it poised for higher credit ratings. Debt sold in the state is trailing the $3.7 trillion municipal market by the most in two years, Barclays Plc data show.

Investors are focusing on Detroit’s approach to what is typically considered the safest form of muni debt, which municipalities use to finance roads and schools. In a June restructuring proposal, Detroit Emergency Financial Manager Kevyn Orr tried to persuade holders of $369 million of unlimited general obligations to accept less than 20 cents on the dollar. The debt is supposed to have the full backing of taxpayers.

“If you’re a bondholder in the state of Michigan, why do you buy a Michigan state G.O. or any G.O. debt in the state?” said Lyle Fitterer, who helps oversee $31 billion in munis at Wells Capital Management in Menomonee Falls, Wisconsin.

State’s Role

“You need to come out as a state and effectively say, ‘Here’s what we’re going to do to make sure you, the bond investor, know the security pledge you have,’” Fitterer said.

Now that Snyder has approved Detroit’s bankruptcy filing, Nuveen, which holds $62 million of the city’s general-obligation bonds, says investors should view such debt as having no greater standing than vendor contracts, leases and retirement liabilities, Shawn O’Leary and Molly Shellhorn, research analysts at the company, wrote in a July 19 report.

Investors should question “whether they should pay any form of safety premium for Michigan general obligation bonds relative to other forms of municipal liabilities in a state where the governor has granted his implicit blessing to such drastic treatment of full faith and credit obligations,” the analysts wrote.

Matt Fabian, a managing director at Concord, Massachusetts-based Municipal Market Advisors, said in a report today that investors should reduce holdings of lower-rated munis from Michigan because their yield spreads should grow. Buyers have been “pulling away” from debt sold in Michigan, which would result in a thinner base of investors, he wrote.

Generalization Risk

Snyder said speculation that Detroit’s bankruptcy would adversely affect borrowing costs of other Michigan municipalities is “stirring the pot.”

“Each city should stand on its own,” he said in an interview last week in Detroit. “What’s going on in Detroit shouldn’t be generalized to other jurisdictions.”

Portage plans to sell $3.1 million of general obligations tomorrow through competitive bid, Bloomberg data show. While Detroit’s filing may influence the sale, Portage’s pension plan is fully funded and the city is rated two steps below the top grade by Standard & Poor’s, Daniel Foecking, director of finance, said in an interview.

“Yes, we’re in Michigan, so it’s possible that it could affect it,” Foecking said. “On the other hand, we have good financials.”

2013 Loss

Bonds of Michigan and its localities have lost 3.6 percent this year, surpassing the 3.4 percent decline for all munis, the first time the state has trailed the market since 2011, Barclays data show.

After Illinois and California, Michigan general obligations offer the most extra yield above top-rated munis among the 17 states tracked by Bloomberg. Yields on Michigan general obligations maturing in 10 years are 0.32 percentage point above an index of benchmark munis.

Potential yield-spread widening for some Michigan localities may offer a chance to buy, Vanguard’s D’Arcy said.

“If you see an event like this, you do see credit spreads widen out” for other issuers in the state, D’Arcy said. The firm will “try and find opportunities where other people are maybe worried about headline risk and you can find some good opportunities away from Detroit.”

To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net; Emily Freeman in New York at efreeman14@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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