Michigan Muni Sale Delays Rise to 3 as Snyder Stands By

Saginaw County joining at least two other Michigan issuers in putting off municipal bond sales shows the fallout from Detroit’s bankruptcy is greater than expected by Governor Rick Snyder and Emergency Manager Kevyn Orr.

The county, about a two-hour drive north of Detroit, delayed a $61 million debt sale because the interest rates investors demanded were higher than it was willing to pay, according to a statement from Philadelphia-based PFM Group’s Public Financial Management unit. Genesee County and Battle Creek have also put off deals since Detroit sought protection.

The postponed sales shouldn’t cause alarm that Detroit’s bankruptcy is affecting Michigan’s ability to sell bonds, said Sara Wurfel, a Snyder spokeswoman. Only two of the 651 Michigan municipalities rated by Standard & Poor’s are scored below investment grade, she said by e-mail.

“This kind of bond timing generally happens on a regular basis anyway and ultimately it should all work out,” Wurfel said. “There continue to be an abundance of sound, smart investments to make in Michigan and our local communities.”

Investors in the $3.7 trillion municipal market have demanded higher yields to own Michigan debt in the past month on speculation that Orr’s plan to impose discounts on Detroit general-obligation bonds of about 20 cents on the dollar would set a precedent, especially in Michigan. Orr made the proposal in June, before Detroit’s July 18 Chapter 9 bankruptcy.

Core Threat

The plan threatened the long-held belief that states and cities will do whatever it takes to avoid defaulting on debt they back. No municipal-debt issuer has used bankruptcy to force a cut in principal on general-obligation bonds.

In interviews last month, Orr said it would be a “reduction to the absurd” to think other cities should be punished as a result of Detroit’s bankruptcy, while Snyder said he expects bond buyers to be “sophisticated investors” and differentiate Detroit’s situation from other municipalities.

Saginaw County, with about 198,000 residents, was set to use the sale proceeds to finance unfunded pension liabilities of about $60 million. Genesee County would have funded water-system facilities. Battle Creek planned to finance improvements to its police department, city hall and public parks.

“Investors can’t price a bond in Saginaw or Genesee or Battle Creek if they don’t know what a general-obligation bond means,” said Erik Gordon, who teaches at the University of Michigan’s Ross School of Business in Ann Arbor. “When somebody changes the rules of the game, there’s not much you can do about it, and you don’t want to play again.”

Widening Spread

The extra yield investors demand to own 10-year general-obligation securities sold by Michigan rather than top-rated municipal debt rose to 0.53 percentage point yesterday, the most since Detroit’s bankruptcy, according to data compiled by Bloomberg. The spread averaged about 0.45 percentage point this year as Detroit’s fiscal crisis escalated.

Saginaw County’s sale of taxable debt will be put off until more favorable interest rates are offered, Controller Robert Belleman said.

“We’re just going to monitor the market, we’re looking to see if Treasuries come back down,” Belleman said by telephone. “Between Treasuries and what investors believe they needed fell outside of our parameters.”

Belleman said he didn’t know if the Detroit bankruptcy had an effect.

Distant Detroit

“You’ll have to ask investors,” he said. “I think we’re so far away, Detroit doesn’t impact me. I don’t think they were fully recognizing” the county’s credit rating, he said.

The county wants to take advantage of a new state law that lets municipalities use bonds to finance pension obligations, Belleman said. It closed its defined-benefit pension to new participants in 2000, he said.

The county’s general-obligation debt sale was set to be the largest in Michigan since Detroit entered bankruptcy.

The county gauged investor interest before delaying the offer, according to three people familiar with the sale who asked not to be identified because the pricing wasn’t final. A portion maturing in 2023 was offered at a yield of about 1.7 percentage points more than benchmark 10-year Treasury notes, the people said. The debt is rated Aa3 by Moody’s Investors Service, its fourth-highest level.

Battle Creek, a city about 120 miles (190 kilometers) west of Detroit, is also rated Aa3 by Moody’s. Finance Director Linda Morrison said its sale will be pushed back a month because of unfavorable interest rates. Detroit’s bankruptcy has probably made the bond market more volatile, she said by telephone.

“It’s hard to put your finger on what’s causing all of this,” Morrison said. “There’ve been so few issuers because of the bankruptcy filing.”

“We want to give the market a little bit of time to stabilize,” she said.

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