By Darrell Preston March 11 (Bloomberg) — Detroit, the largest U.S. city whose debt is rated below investment grade, will ask investors today to buy $250 million of its debt without having filed annual financial reports on time for five years. The city, which warned investors in its preliminary official statement of the possibility of filing for Chapter 9 bankruptcy protection, is providing a June 30, 2008, financial statement, its most recent, to investors. A fiscal 2009 report is expected to be complete by May 31, said city spokesman Dan Lijana, in an e-mail. “This issue is not for the faint of heart,” said Richard Ciccarone, chief research officer of Oak Brook, Illinois-based McDonnell Investment Management, which oversees $6.8 billion of municipal debt. “It certainly raises eyebrows.” Detroit will provide backing by payments of state aid from sales taxes to the general obligation issue, which enabled the issue to maintain investment grade. Michigan’s state treasurer can pay the aid directly to the trustee for the bonds, bypassing the city to ensure the debt is serviced, according to offering documents. The treasurer also agreed not to withhold payments when the city is late filing financial statements, as it has in the past. The municipality is selling the same week that state and local governments are scheduled to bring more than $11 billion of long-term securities to market. The largest deals include $2 billion from California and $696 million from the District of Columbia. Goldman Sachs Detroit is selling $250 million of bonds through investment banks led by Goldman Sachs Group Inc. to help cover budget deficits expected to total $280 million this year. The deal will probably appeal to investors seeking high-yield municipal debt, predicted Ciccarone, precluding the city from a market with tax- exempt yields near three-month lows . The city lost its investment-grade ratings as automobile makers in Michigan began cutting jobs and the tax revenue declined, which led to an expanding budget gap covered by short- term borrowing. The new bonds will spread repayment of the deficit debt across a longer period. Detroit general obligations maturing in 2024 traded yesterday at a yield of 7.56 percent, according to Municipal Securities Rulemaking Board data. That compares with yields of 3.36 percent to 3.5 percent for top-rated 14-year municipal debt yesterday, according to Municipal Market Advisors Inc. State Revenue Detroit will benefit in pricing from the state revenue added to its general obligation backing, said Ciccarone. Moody’s Investors Service, which rates the city’s general obligation debt Ba3, its third-highest rating below investment grade, assigned an A1 rating to today’s issue because of the legal structure that protects state payments to bondholders. Standard & Poor’s, which carries a BB rating on the city’s general obligation debt, assigned an AA- rating to the new issue. Michigan has previously withheld payments because the city has been late filing financial statements, according to the offering documents. Detroit disclosed that it expects state aid to be withheld for February and April this year because its 2009 financial statement is late. Money for bondholders isn’t expected to be withheld, according to the bond documents. Detroit also disclosed there’s no precedent for how its state aid payments would be handled in the event of a Chapter 9 bankruptcy filing because there’s never been a local instance. “The lack of precedent in Michigan makes the risks associated with such a filing difficult to assess,” the preliminary offering statement said. Financial Crisis While the city is still in a financial crisis, “insolvency isn’t on the horizon or on the agenda,” said Mayor Dave Bing , in a prepared statement provided by Lijana. A request to make finance officials available for comment was declined by Lijana. The delay in financial statements occurred under previous mayors and Bing plans to submit on time the 2010 audit, the first full budget cycle under his administration, Lijana said. Following are descriptions of pending sales of municipal debt in the U.S.: FLORIDA’S CITIZENS PROPERTY INSURANCE CORP. , the state’s largest real estate insurer, plans to sell $2 billion in tax- exempt senior bonds next week. Proceeds from the debt, secured by pledged revenue deposited to the insurer’s high-risk account, will provide financing to pay claims during the 2010 hurricane season. Underwriters led by JPMorgan Chase & Co. will market the securities. They are rated A+ by S&P and A2 by Moody’s. (Added March 9) ORLANDO-ORANGE COUNTY EXPRESSWAY AUTHORITY , which operates 100 miles (161 kilometers) of toll roads in the region, plans to sell $350 million of tax-exempt revenue bonds next week. Proceeds from the sale will help finance the authority’s capital program. JPMorgan Chase & Co. will underwrite the securities, rated A1 by Moody’s and A by S&P. (Added March 9) CALIFORNIA , the lowest-rated U.S. state, intends to raise as much as $5 billion from investors this month with its first debt sales since November, according to Treasurer Bill Lockyer . JPMorgan Chase & Co. and Morgan Stanley were selected to manage a tax-exempt deal of as much as $2 billion today, and Citigroup Inc. and Bank of America Merrill Lynch will handle a taxable offering later in the month, according to the state treasurer’s Web site. California is rated A- by S&P, Baa1 by Moody’s and BBB by Fitch. (Updated March 11) MASSACHUSETTS , the second most-indebted state per capita after Connecticut, plans to sell $538.9 million of floating-rate general obligations as early as this week. The date of the sale will be determined by market conditions, according to the state treasurer’s Web site. Proceeds will help refinance outstanding variable-rate demand bonds supported by an agreement from Citibank that expires later this month, according to Moody’s. Underwriters led by Morgan Stanley will market the issue. The state’s general obligations are rated Aa2 by Moody’s, while Fitch and S&P rate them AA, the third-highest of 10 investment grades. (Updated March 9) UNIVERSITY OF TEXAS , with nine academic locations and six health institutions, plans to sell $373.3 million of fixed-rate revenue bonds next week. Proceeds from the sale of the tax exempts will be used to refinance outstanding debt. It sold $331.4 million of tax-exempt securities last week with yields ranging from 0.66 percent on securities maturing in 2012 to 3.5 percent on securities due in 2024. The sale will be marketed by RBC Capital Markets, a unit of Royal Bank of Canada. The securities are rated AAA by S&P and Fitch and Aaa by Moody’s. (Added March 11) ILLINOIS, the second-lowest rated U.S. state after California, will take bids today from banks seeking to underwrite $300 million of Build America Bonds and $56 million of non-subsidized taxable notes. The deal will finance school construction, according to John Sinsheimer , the state’s director of capital markets. Illinois, which last sold Build America securities in a $1 billion deal on Jan. 28, is rated A2 by Moody’s, A+ by S&P and A by Fitch. A statutory requirement calls for 25 percent of all state debt to be bid competitively, Sinsheimer said. Banks led by William Blair & Co. will negotiate the sale of an additional $700 million in Build America securities in mid-March, he said. (Updated March 11) To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net .
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Detroit Sells $250 Million of Its Debt Without Recent Disclosure Filings
