Michigan’s 4.375% Yield on School Notes Shows Detroit Stigma

Michigan’s Finance Authority is offering an interest rate almost 14 times higher than that on top-rated bonds to sell $92 million of one-year notes for Detroit’s public schools.

Today’s deal is the first tied to the Motor City since it sought bankruptcy protection July 18. The bonds are backed by state aid payments.

The securities maturing in August 2014 are being offered with a preliminary yield of 4.375 percent, down from 4.5 percent earlier in the sale, according to three people familiar with the deal who requested anonymity because the pricing wasn’t final. That compares with a 0.32 percent interest rate on benchmark AAA munis due in one year.

The notes “seems pretty darn cheap,” Alan Schankel, head of fixed-income research at Janney Montgomery Scott LLC, said in an e-mail. Yields move inversely to bond prices.

The yield penalty is the latest example of how investors in the $3.7 trillion municipal market are pushing up borrowing costs for issuers in Michigan and around Detroit after state-appointed emergency manager Kevyn Orr filed a record Chapter 9 bankruptcy last month. Orr has sought to give some general-obligation bondholders less than 20 cents on the dollar.

Offerings Delayed

Last week, the authority sold revenue bonds for Ypsilanti Community Schools, about a half-hour drive from Detroit, with yields as high as 4.82 percent for tax-exempt debt maturing in August 2026, according to data compiled by Bloomberg. The sale came after three other issuers in the state -- Genesee County, Battle Creek and Saginaw County -- postponed offerings that followed Detroit’s bankruptcy because rates were too high.

While Orr has no authority over Detroit’s school district, it has its own emergency manager, Jack Martin. The district and the city are “unrelated legal entities created and existing under different laws of the state,” according to offering documents. The district was Detroit’s fourth-biggest employer last year, with about 7,350 workers, the document shows.

Standard & Poor’s rates the one-year Detroit school debt SP-1, its second-highest grade on short-term securities. The notes have first claim to state-aid revenue for repayment.

The proceeds will help cover the autonomous school district’s anticipated cash-flow deficits for the fiscal year that ends in June, according to offering documents.

Terry Stanton, a spokesman for Michigan Treasurer Andy Dillon, didn’t immediately respond to a voicemail and e-mail seeking comment on the sale.

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