Municipal debt issuance in Michigan hits turbulence after Detroit bankruptcy forcing three local governments to pull offerings - will Oakland County actually move forward with its 300 million bond offering next month or also be forced to pull its deal ?

http://www.businessinsider.com/michigan-muni-debt-sales-pulled-after-detroit-bankruptcy-filing-2013-8

SAGINAW, Mich. (AP) — Three governments in Michigan have pulled planned municipal bond sales off the market since Detroit filed for bankruptcy protection last month.

On Thursday, Saginaw County withdrew a roughly $61 million sale to cover pension obligations. Ahead of that decision, Genesee County withdrew a $54 million sale to finance a water and sewer work. And Battle Creek delayed a $16 million general obligation bond issue.

The decisions come amid concern that Detroit's bankruptcy will make it more difficult for communities to borrow money.

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http://www.freep.com/article/20130808/BUSINESS06/308080095/Oakland-County-bond-market-Orr-bankruptcy

Oakland County says it will move ahead with a more than $300-million bond issue next month and avoid what some in the industry are calling a Detroit “penalty” of higher interest rates because of the way Detroit emergency manager Kevyn Orr has proposed treating bondholders of general obligation bonds, debt instruments that typically pay to build schools, arenas and other public works.

Other local Michigan governments have announced delays to large bond issues amid the fallout from Detroit’s bankruptcy, citing lower demand and higher interest rates.

The Oakland County sale, which is a refinancing of existing bond debt, could save the county as much as $130 million in interest over the life of the bonds, said Robert Daddow, deputy executive for Oakland County, which has a AAA bond rating.

“Any issue Detroit may have from their implosion isn’t going to affect us,” he said. “Our credit is going to stand on its own.”

Still, even for some top-rated local governments, there could be a de facto Detroit bond penalty from the market,experts say.

Daddow said Bank of America Merrill Lynch, which was selected as senior underwriter for the offering, told the county its strong rating means the Detroit bankruptcy would not impact its sales. But other finalists for the job predicted there could be as much as a 5 to 15 basis point penalty on the county’s debt because of the Detroit bankruptcy situation, he said.

Daddow also noted that counties and cities across the country face general headwinds due to other worries in the municipal bond market, mainly the threat of higher interest rates ahead.

Last week, Genesee County became the first in Michigan to cancel a large bond issue as a result of Detroit’s historic Chapter 9 filing. The county pulled its planned $54-million bond sale for a water and sewer project once investors reportedly demanded that the county pay higher-than-expected yields. The county, which includes Flint, has a lower bond rating than Oakland County.

Battle Creek decided to postpone a $16-million general obligation bond issue, saying it wanted to wait for better market conditions. It also has a lower bond rating.

Saginaw County pulled a planned $61-million municipal bond sale off the market Thursday.

Gov. Rick Snyder said Wednesday that decisions to delay shouldn’t be interpreted that Detroit’s bankruptcy is affecting the finances of other, healthier Michigan communities.

“It shouldn’t cause widespread concern, but it is something people should always be aware of. Most communities in the state have good financial situations and are nowhere near being $18 billion in debt” like Detroit is, Snyder told the Free Press.

As for bond sales that were pulled, “Some of that happens on a regular basis anyway,” Snyder said. “Ultimately, it should all work out. Investors will invest where there is a financial return, based on the appropriate risk.”

Some bond market observers say investors are reacting negatively to emergency manager Orr’s decision to break precedent and treat holders of the city’s general obligation bonds as unsecured creditors. In past municipal bankruptcies, general obligation bonds were given high priority as they were considered secured by the local government’s ability to raise taxes to pay back the debt.

Daddow noted that Oakland County is issuing new debt in order to refinance old debt — much like paying off a mortgage as interest rates decline. The county would sell the bonds to refinance retirees’ health care certificates of participation that were originally issued in the summer of 2007.

The amount that would be outstanding on April 1, 2014, when the certificates of participation are called, is $422 million, Daddow said.

The county also plans to use some excess assets it has accrued over time to pay down some of the original debt, possibly $75 million.

Oakland County currently pays 6.2% on the certificates and expects the rate on the new bonds to be in the low 3% range, which could equal a $10 million-$15 million savings each year through 2027.

“We already have a history of paying our debt service,” Daddow said of Oakland County. “We are a AAA county.”