Detroit Schools Dodge Default After Michigan Refinances Bondsby
Finance authority sells $226.38 million in private placement
State backing on old bonds was expiring by end of September
Michigan issued $226.38 million of bonds in a private sale that will allow Detroit’s financially struggling school district to avoid defaulting on securities backed by state aid set to be diverted elsewhere on the last day of the month.
The Michigan Finance Authority sold the bonds, backed only by property taxes, in a private placement with JPMorgan Chase & Co., Danelle Gittus, a spokeswoman for the state Treasury Department, said in an e-mailed statement. The net interest cost, or the estimated overall interest expense of the securities, was 3.78 percent through March 31, 2023.
The refinancing was authorized by a new state law in June that reorganized the district into two districts, with state aid backing the existing bonds being transferred to a new district set up to operate schools. The old district exists only to repay outstanding debt and other liabilities. The old district will continue to collect a property tax to repay the new debt.
The outstanding bonds issued in 2011 and 2012 are refinanced at par plus a redemption premium.
Without the refinancing the shift threatened to trigger a technical default on the bonds, which have been cut five levels into junk by S&P Global Ratings because of the uncertainty.
Some of the to-be-refinanced bonds that mature in 2018 rose Wednesday to 98.4 cents on the dollar from 95.3 cents a day earlier, according to data compiled by Bloomberg.