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Monday, 02 September 2013 22:00

Detroit bankruptcy’s side effects felt in West Michigan bond market

Written by  Jane C. Simons and Joe Boomgaard
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Battle Creek recently delayed a bond sale that would have gone toward capital improvements in the city, including at Kellogg Arena. The delay stemmed from the bond market’s uncertainty with Michigan-based bonds following the bankruptcy filing by the City of Detroit. Battle Creek recently delayed a bond sale that would have gone toward capital improvements in the city, including at Kellogg Arena. The delay stemmed from the bond market’s uncertainty with Michigan-based bonds following the bankruptcy filing by the City of Detroit. COURTESY PHOTO

All eyes of municipal financial executives in West Michigan and across the state this week will focus on Oakland County.

That’s because the southeast Michigan county is preparing a $300 million bond issue to refinance existing bond debt to more favorable terms. Importantly, the bond issuance for the county with a AAA bond rating occurs against the backdrop of the City of Detroit’s Chapter 9 bankruptcy filing on July 18.

In the wake of Detroit’s filing, Michigan municipalities including Battle Creek, Genesee County and Saginaw County — all of which have a lower bond rating than Oakland County — put their bond sales on hold as they faced paying more than they had expected or failed to garner much interest from the market.

Those higher rates are in effect a surcharge or “penalty” related to the market’s uncertainty about Detroit’s situation, said Mitch Stapley, chief investment officer at Fifth Third Asset Management. Oakland County’s bond sale scheduled for this week will serve as “a litmus test for the market appetite for Michigan paper,” he said.

The cities that have delayed a bond sale faced a convergence of a few timing issues, Stapley said. For one, summer is a slow season because many investors are on vacation. That’s been coupled in recent months with some volatility in the bond market with some rates creeping upward, Stapley said. When you add in trying to go to market with a bond issuance a month after the largest municipal bankruptcy in the history of the United States, “that’s probably not the best timing,” he said.

The net effect of the Detroit bankruptcy for municipalities in West Michigan depends on the municipality, but it’s safe to say that West Michigan bond issuers “will get a little bit of a ding,” Stapley said.

“The Battle Creeks, Muskegons, Flints and Saginaws will have more difficulty accessing the market,” he said. “Grand Rapids, Holland and Traverse City … will have access to the market. Will they pay a little bit more? Maybe. … As we look at it, it might cost a little more to issue (bonds). You might pay a little more of a penalty, but will you pull the deal? I don’t think so.”

That difficulty in accessing the market caused Battle Creek on Aug. 5 to become the second Michigan municipality to delay a bond sale. The city had been preparing to issue about $16 million in Capital Improvement Project bonds, said Jim Ritsema, Battle Creek assistant city manager.

“We had some money in there for resurfacing linear paths in the city; improvements to Kellogg Arena to make that sustainable; and a Quiet Zone for downtown, which is a project we’d do through the Federal Rail Administration,” Ritsema said.

The last project would require making improvements to eight or nine railroad crossings along the corridor in the city to enable trains to go through Battle Creek without sounding their horns.

Historically low interest rates prompted officials with the city and city commissioners to think about reinvesting in Battle Creek’s capital infrastructure. Ritsema said these projects, in addition to several others, have been put on hold.

“The municipal bond market is pretty much non-existent in Michigan right now,” Ritsema said. “It wouldn’t mean we wouldn’t be able to sell bonds, but at what interest rate?”

Linda Morrison, Battle Creek’s finance director, said Battle Creek has good credit ratings and plans to stand on those ratings.

“We all knew that Detroit was struggling, but we didn’t think there would be a bankruptcy,” Ritsema said. “We need to be evaluated on our own credit. Once this dies down, we’ll proceed and get the bonds sold.”

Less than one week after the bond sale delay in Battle Creek, officials with Saginaw County postponed a $60.55 million pension obligation bond sale. The week before Battle Creek officials announced their decision to delay the bond sale, officials with Genesee County decided to put a hold on the offering of a $54 million water and sewage bond because of low investor interest.

“From what I understand in the case of Battle Creek, the underwriters did not really try very hard to bring that to market,” said Roger Swets, an attorney at the Clark Hill law firm in Grand Rapids. “With Genesee and Saginaw, I think they didn’t want to be the first test case.”

Swets said he thinks communities in West Michigan will still be able to sell bonds without any problems. However, he said municipalities in proximity to Detroit or Flint will raise more questions.

The expectation was that the state of Michigan would stand behind Detroit’s bonds, but Swets said there is a very real possibility that Detroit’s debts won’t be paid in full in the bankruptcy process, which has made the bond market very nervous.

“The thought that the general obligation debt would be reduced in bankruptcy is something the bond market in Michigan didn’t think would happen,” Swets said. “It paints everyone in Michigan with a broad brush.

“If the bankruptcy lessens the amount owed to the bondholders, it will affect all taxpayers in Michigan. It will affect the interest rates we will pay. The state of Michigan will be paying higher rates on premiums because with the bankruptcy, premiums have gone up.”

Fifth Third’s Stapley said the unknowns stemming from the Detroit bankruptcy proceedings have investors being “very cautious,” but time should help bring more clarity to the situation.

“We need to give the market a chance to take all that information in and digest it,” Stapley said. “I think they’ll find they’re able to access the market in October, November and December.”

But he added the caveat: “That’s our initial feel right now but we’ll reassess once we see how Oakland goes (this) week.”

Stapley said one positive he’s seen for West Michigan is that the investors and financial types he’s interacted with around the country have acknowledged that Detroit’s crisis is not a statement about the financial health of the rest of the state.

“People understand that there’s more to state of Michigan than the city of Detroit. It’s different on the west side and up north,” he said.

The Detroit bankruptcy is “still a black eye for us, but people do not believe the entire state of Michigan’s fortunes are tied to the fortunes of Detroit like they may have 25 years ago,” Stapley said. “We’ve come a long way in that regard.”

Read 6090 times Last modified on Monday, 02 September 2013 22:11

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