Originally Published: August 02, 2013 6:44 AM??Modified: August 02, 2013 7:25 AM
By Bloomberg
A delayed bond sale by a Michigan county that's home to the birthplace of General Motors Co. shows how Detroit's fiscal distress is penalizing local governments in the eighth-largest U.S. state by population.
Genesee County put off the $54.2 million offering planned for yesterday, two weeks after Detroit entered the nation's biggest municipal bankruptcy. The sale would've been the largest in Michigan since the court filing, data compiled by Bloomberg show. Flint, GM's birthplace and the seat of Genesee County, is about an hour's drive northwest of the Motor City.
A proposal to pay off part of Detroit's general-obligation debt at deep discounts has worried some investors in municipal securities that the plan may set a precedent for other Michigan cities enduring fiscal stress. Detroit Emergency Manager Kevyn Orr's blueprint to avoid bankruptcy included the losses for bondholders. Yields are rising on Michigan bonds, pushing up the state's costs to borrow in the $3.7 trillion muni market.
"You're seeing credits associated with Michigan in general having a tough time and spreads widening out in sympathy," said Dexter Torres, head trader at New York-based Samson Capital Advisors LLC, which manages about $7 billion of municipal securities. Munis issued by the state have reflected a penalty at least since January, data compiled by Bloomberg show.
Yield penalty
The extra yield investors demand to own 10-year general-obligation securities sold by Michigan rather than top-rated debt rose to 0.44 percentage point Thursday, the most since July 12, Bloomberg data show. The spread has averaged about 0.45 percentage point this year as Detroit's fiscal crisis escalated.
Standard & Poor's may adjust ratings on general-obligation bonds from issuers throughout Michigan depending on how Detroit's debt is dealt with in bankruptcy, Jane Ridley, the New York-based company's primary Detroit analyst, said in an online presentation Thursday.
Terry Stanton, a spokesman for Michigan Treasurer Andy Dillon, didn't respond to a telephone message seeking comment on the treatment of debt from Michigan issuers.
"We believe it prudent for municipal investors to question whether they should pay any form of safety premium for Michigan general-obligation bonds relative to other forms of municipal liabilities," Shawn O'Leary and Molly Shellhorn, Nuveen Investments Inc. analysts in Chicago, said in a report following the bankruptcy filing for the state's most-populous city.
Widespread poverty
Flint, where GM founder William Durant once made horse carriages, is also run by a state-appointed emergency manager. About 38 percent of its 101,000 residents live in poverty, compared with 36 percent in Detroit, 19 percent for Genesee County and the 16 percent Michigan average, U.S. Census Bureau data show.
The county planned to sell bonds tied to water-system revenue, backed by a limited-tax general-obligation pledge, to help finance land and facilities to add supply from Lake Huron, according to offering documents. The county buys water from Flint, which gets it from the Detroit Water and Sewerage Department. S&P rates Genesee debt A+, its fifth-highest rank.
Keith Francis, the county controller, and Deb Cherry, its treasurer, didn't respond to emails and telephone messages seeking comment on the delay. Paul Stauder at Stauder, Barch & Associates, the deal's financial adviser, also didn't respond to a voicemail seeking comment.
Justin Perras, a spokesman for New York-based JPMorgan Chase & Co., the lead underwriter, declined to comment.
Wayne County downgrade
Following Genesee County's delay, Moody's Investors Service cut its rating to Baa3 on Wayne County's almost $726 million in general-obligation limited-tax debt. Moody's cited fiscal pressures from a depreciating tax base and budget deficits, as well as Detroit's condition, for the single-step downgrade to one level above junk. The city is the county seat.
Saginaw County, north of Detroit, still plans to sell almost $61 million of general-obligation debt next week. The deal will help the county of about 198,000 residents finance unfunded pension liabilities of about $60 million. The bonds have an Aa3 rating from Moody's, the fourth-highest level.
"We think we will get positive attention toward this sale," Robert Belleman, Saginaw County's controller, said by telephone Thursday. "The county is in strong financial health and has limited outstanding debt. And people will see that this sale is more for budget stabilization."
? Brian Chappatta writes for Bloomberg News.
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