CHICAGO - Detroit launched its tender offer program for holders of $5.2 billion of water and sewer bonds Thursday night, offering tender prices that range from a high of 118 cents on the dollar to a low of 72.5 cents on the dollar.
The offer could be a key part of the city's bankruptcy exit plan, depending on how many investors participate, ending a months-long battle with the water and sewer bondholders fighting against impairment. Detroit hopes to achieve savings on the tender program, as well as a massive refinancing of most of its $5.2 billion debt portfolio. Investors who agree to the tender, and are ultimately paid by the city after the refinancing, would have to agree to drop all litigation related to the debt.
The fixed tender prices vary by CUSIP. They're posted on bondcom.com/dwsd, along with disclosure documents and other materials tied to the deal.
The tender offer is an alternative to Detroit's current plan for most of the water and sewer bonds, which is impairment through either stripping out call protection or lowering coupon rates.
Investors have until Aug. 21 to tender their debt. A sale of the tender takeout as well as a refunding of currently callable water and sewer bonds and $150 million new-money debt is tentatively set for Sept. 4. That depends on an expedited hearing from the bankruptcy court and an order authorizing the financing.
The complex and innovative financing could end stalled negotiations with water and sewer holders and resolve what has turned into one of the thorniest aspects of the Detroit bankruptcy case. It would let the city avoid the taint of trying to impair special revenue bonds - previously considered debt protected from bankruptcy - in addition to interest-rate and debt-service savings, the finance team said.
Detroit will finance the deal either through a bridge loan from Citi and possibly other lenders or through a public offering. That decision will be made after the Aug. 21 tender deadline.
The finance team has already met with ratings agencies, and is pushing for an investment-grade rating on the junk-rated bonds. The team is touting the system's fundamental credit position as a large regional department as well as a bankruptcy order authorizing the deal.
For the deal to work, the city must win sufficient participation from investors who want to shed the risk and headache of the city's threatened impairment, bankruptcy, and possible post-bankruptcy litigation. If investors agree to the deal, they will be repaid after the city refunds the debt. It's possible the city will not move forward with the deal if it does not get sufficient tenders. The city will not specify the amount it will need to go ahead with the financing or how much it expects to save from the deal.
"If sufficient bonds are tendered to and purchased by the city, resulting in sufficient prospective debt service savings as determined by the city, provisions of the plan that impair the bonds would be amended to unimpair the bonds," says a letter from Detroit Emergency Manager to bondholders posted on the disclosure web site.
The tender prices are broken down by a variety of factors, including whether the debt is currently impaired in the city's confirmation plan, its coupon rate, call date, maturity, insurance and other factors.
On the water side, most of the $1.5 billion of debt that is not being impaired under the current plan - either because their call dates are soon or their coupon rates are already low - are seeing fixed tender offers at par or above. The lowest offer of the $1.5 billion unimpaired water debt is 79 cents on the dollar for $288.8 million of 2006D bonds with a senior lien, Assured Guaranty insurance, and an adjustable rate. Bonds with adjustable rate saw among the lowest offers.
The highest offer for unimpaired water debt is 105, for senior-lien 2001 bonds with a 4% coupon, 2018 maturity and carrying insurance from both National Public Finance Guarantee and Berkshire Hathaway.
Offers on the $1.3 billion of impaired water debt are mostly above par, at 102 cents or higher. The highest tender price is 117.8 cents on the dollar, and that's for $110.5 million of 2001 senior lien bonds with a 7% coupon, a 2027 maturity and 2019 call date and carrying Assured insurance.
The lowest price is 72.5 cents on the dollar for $10.1 million of 1999A capital appreciation bonds with a 2021 maturity and National insurance. There are a total of six CAB structures among the water and sewer bonds, which are offered 93 cents or lower.
There did not appear to be much difference in terms of tender prices between bonds that carry insurance and those that don't.
On the sewer side, the city wants to tender $1.46 billion of sewer bonds not impaired under the current plan and $1.28 billion of bonds impaired under the plan. Like the water bonds, the tender prices for unimpaired debt fluctuated but generally were above par, with the exception of adjustable-rate bonds. Also like the water bonds, prices are higher for the debt impaired under the plan, with many above 105 cents on the dollar.
