Michigan Cities Gaining After Detroit Breaks Pledge: Muni CreditBrian Chappatta
Michigan municipalities are selling the most bonds since July, showing investors are warming to the state’s debt after Detroit’s record bankruptcy led to the postponement of at least $131 million of deals.
Localities from Michigan are offering $88 million of debt this week, data compiled by Bloomberg show. They are selling as the extra yield buyers demand on Michigan general obligations is down 30 percent from a record set last month.
This week’s issuers included an economic-development agency in Michigan’s Wayne County, home of Detroit, which sold $17 million for a retirement community. The bonds didn’t have a rating, placing them among the riskiest part of the $3.7 trillion municipal market. The sale followed Genesee County’s $35 million deal, the biggest since Detroit sought court protection on July 18. The county seat is Flint, which also has a state-appointed emergency manager.
“People have had more of a chance to digest the meaning of the Detroit story and differentiate it from other deals out there,” said Bill Ahern, who oversees $80 million of Michigan funds from Boston at Eaton Vance Management. “There’s a short memory in this market.”
The rebound following Detroit’s $18 billion bankruptcy is the latest example of how local signs of distress have failed to derail municipal borrowing. Demand for Michigan debt waned after Detroit’s emergency manager, Kevyn Orr, took the unprecedented step in June of attempting to impose losses on general-obligation holders as part of a plan to fix the city’s finances.
Michigan’s situation mirrors how California’s market stabilized after Stockton, San Bernardino and Mammoth Lakes sought court protection last year. Relative borrowing costs for localities in the Golden State reached a six-month high after the filings, and have since fallen to the lowest since 2008.
Investors demand 0.53 percentage point more to own Michigan general-obligation bonds instead of benchmark munis, Bloomberg data show. That’s down from a 2013 high of 0.75 percentage point on Aug. 20.
The bond sales and narrowing yield spread also validate Michigan Republican Governor Rick Snyder’s stance that bond buyers would eventually differentiate Detroit’s situation from other localities in the state. Genesee County and Battle Creek issued debt in the past week after delaying deals in August.
Sara Wurfel, a Snyder spokeswoman, didn’t return an e-mail seeking comment on the issuance rebound.
Genesee’s postponement paid off for its taxpayers. The locality put its Aug. 1 water-revenue bond deal on hold “to achieve a more competitive interest rate,” Jeff Wright, who’s responsible for the county’s water supply as drain commissioner, said in a statement. The deal this week will save millions of dollars relative to what the county would have had to pay in August, according to the statement.
The obligations, which will help finance land and facilities to add water supplies from Lake Huron, still came at a higher-than-average cost. The portion maturing in 10 years was priced to yield 4.03 percent, compared with 3.87 percent on benchmark A rated revenue bonds.
The county’s debt has an A+ rating from Standard & Poor’s and was backed by Build America Mutual Assurance Co., which carries an AA grade, third-highest.
In Wayne County, proceeds from the agency’s $17 million sale will fund construction of housing for seniors, part of a community to be called “The Rivers of Grosse Pointe.” Unrated bonds default more than 30 times more frequently than debt that carries a credit rank, according to a study from the Federal Reserve Bank of New York.
Tax-free securities maturing in December 2043 priced to yield 8 percent, equivalent to a 13.3 percent taxable interest rate for individuals in the highest federal income bracket.
“These deals are certainly coming at wider spreads than you would expect from other states’ bonds,” Ahern said. “There’s still some taint on them. Over time, that will continue to dissipate.”
Other localities opted to avoid the market. Muskegon County sold $39 million of general obligations this month directly to Capital One Financial Corp. through a private placement.
Tatiana Stead, a spokeswoman for McLean, Virginia-based Capital One, the lender that gets more than half its revenue from credit cards, didn’t return an e-mail seeking comment on the transaction.
The county of 170,000 about 200 miles (322 kilometers) west of Detroit will use the proceeds to fund a new jail and juvenile transition center, said Heath Kaplan, finance and management services director. The bonds have an interest rate of 4.75 percent and an average life of 13 years, he said.
“Our first plan was to do a negotiated sale,” Kaplan said in an interview. The county board mandated an interest rate no higher than 5 percent, and “once we saw the bankruptcy cause a ripple effect across the market, we had to go back to the drawing board,” he said.
In the week ahead for the Michigan market, Capac Community School District and Bad Axe Public Schools plan to offer a combined $9.3 million of debt, Bloomberg data show.
The past week suggests the schools will find buyers.
“There’s no doubt that the Michigan market is starting to thaw out,” said Adam Mackey, head of municipal fixed income in Philadelphia at PNC Capital Advisors, which oversees $6.5 billion in munis. “There was obviously this period after Detroit where investors were trying to figure out what pledge they had, and where they stood in Michigan.”
Localities from Virginia to New Mexico are selling $4.2 billion in long-term debt this week, down from $5.8 billion last week.
Benchmark 10-year munis yield 2.94 percent, the lowest in a month, after declining for eight straight trading sessions, the longest streak since December. The interest rate compares with 2.69 percent for similar-maturity Treasuries.
The ratio of the yields, a gauge of relative value, is about 109 percent, compared with an average of 93 percent since 2001. The higher the figure, the cheaper munis are compared with federal securities.