(For more credit-market news, click on TOP CM. For Municipal Credit Markets column alerts, see SALT MUNCREDIT.)
April 2 (Bloomberg) -- The biggest Michigan municipal-bond sale since Detroit’s bankruptcy will allow another locality under emergency management to sever ties with the Motor City’s water and sewer system.
Flint, 68 miles (109 kilometers) northwest of Detroit, partnered with three nearby counties to form the Karegnondi Water Authority. The agency will use proceeds from yesterday’s $221 million tax-exempt debt offer to build a 63-mile pipeline to Lake Huron that by 2016 will wean more than 500,000 people from reliance on Detroit for water.
The undertaking will help the municipalities distance themselves from Detroit after its Chapter 9 filing in July boosted borrowing costs statewide. Counties outside Detroit that aren’t part of the Karegnondi push are resisting Emergency Manager Kevyn Orr’s proposal to create a regional water authority, leading him to inquire about possible private operators.
“The rhetoric has gotten even noisier, but municipalities are just trying to be prudent in protecting their interests and their constituents, to ensure they don’t bail out Detroit on their backs,” said Robert DiMella, who oversees about $7.5 billion of local debt as co-head of MacKay Municipal Managers in Princeton, New Jersey.
The stalled water and sewer talks have implications for all parties in Detroit’s record $18 billion bankruptcy. Orr has said creating a Great Lakes Water and Sewer Authority would allow the city to lease its operations to the agency for $47 million a year and boost payments to creditors. This week, the city lowered its recovery projection for general-obligation investors to 15 cents on the dollar, from 20 cents in February.
Orr wants to exit bankruptcy by September, when he can be removed from his post by the city council. He said last week that he’s “past the point of having the luxury of having a lot more time to convince folks.”
Officials in Flint, the seat of Genesee County, aren’t waiting to see how the bankruptcy shakes out.
The bond deal from Karegnondi Water Authority, which includes Genesee, Lapeer and Sanilac counties, was the state’s largest since Michigan’s Building Authority issued $583 million in June, data compiled by Bloomberg show.
The water agency’s sale included debt maturing as late as November 2043 that priced to yield 4.89 percent, or about 1.2 percentage points more than benchmark munis. The securities are rated A2 by Moody’s Investors Service, five steps below the top.
Flint has bought treated water from Detroit for about 30 years, offering documents show. Its contract expires this month. The purchases represented 5 percent to 6 percent of the Detroit water and sewerage system’s revenue, Chief Financial Officer Nicolette Bateson said.
Losing Flint as a customer “equates to $22 million, so it’s not a loss we take lightly,” Bateson said by telephone. The city is negotiating with Genesee County to provide a backup water supply when the new pipe is completed, she said.
“The loss of revenue from the contract will not impact efforts to regionalize or privatize” Detroit Water and Sewerage Department, Bill Nowling, Orr’s spokesman, said in an e-mail. Karegnondi Water Authority “has approached DWSD about providing water to its system until it is 100 percent operational.”
The counties say they have a financial incentive to separate from Detroit. Flint and Genesee County pay higher rates because they’re farthest from the Detroit operations, said Jeff Wright, the Genesee County drain commissioner and chief executive officer of the Karegnondi authority.
The agency’s name is how the native Huron-Petun people referred to Lake Huron, according to a publication of the Michigan Association of County Drain Commissioners.
The new pipes “will save our customers money and it will be a long-term more reliable system,” Wright said.
Neighboring municipalities that Orr wants to include in the Great Lakes authority have balked at the proposal, concerned that rates may rise.
Anthony Marrocco, Macomb County public works commissioner, said that discussions with the city have stalled, and that Orr’s pursuit of a potential private operator isn’t worrisome.
``He put on the table $47 million that he wanted suburbanites to pay” annually, Marrocco said. “We haven’t accepted it.
``We’re going to have our service regardless of who’s going to be in charge of the DWSD,'' he said.
Oakland County, which borders Detroit to the north, is considering alternatives to the Detroit water system, said Robert Daddow, deputy county executive. A committee of the board of commissioners voted yesterday to spend as much as $3 million -- $500,000 immediately -- to explore options, he said. The expense still needs to be approved by the full board, he said.
The county, which has a AAA bond rating, hired law firm Carson Fischer PLC to represent it in talks about the Great Lakes agency proposal, Daddow said. The Detroit News reported the hiring earlier.
Orr “is doing what he’s supposed to do -- he’s rattling everyone’s cage,” said Guy Davidson, who oversees $30 billion as director of munis at AllianceBernstein Holding LP in New York. The water and sewer system talks “have been a lot messier than most municipal investors thought going into it,” he said.
Investors such as Davidson and DiMella who own Detroit water and sewer bonds have their own interests to protect.
Orr had said since Detroit filed in July that $5.8 billion of debt tied to Detroit’s water and sewer system would be repaid in full. Yet Standard & Poor’s cut the securities last week to CCC, eight steps below investment grade, citing a possible exchange offer that would be equal to default.
Bonds fell after the downgrade. Uninsured Detroit water bonds maturing in July 2041 traded March 27 at about 85 cents on the dollar, the lowest since January, Bloomberg data show.
Detroit hasn’t missed a payment to water investors, whereas the city has defaulted on its general obligations. While a failure to turn the Detroit water and sewer system into a regional agency may harm bondholders, the worst-case scenario is probably still getting face value, MacKay’s DiMella said.
Orr must work on parallel tracks seeking a public water authority and a private operator, said Doug Bernstein, a bankruptcy lawyer at Plunkett Cooney PC in Bloomfield Hills, Michigan.
“The calendar is working against him,” he said. “He cannot take one course of action and hope he can execute it without having a fall back plan.”