Michigan municipalities are facing difficulties in bond markets since the City of Detroit filed its Chapter 9 bankruptcy, reports MiBiz.
For years, municipal bonds have been a shelter for investors that thought them to be safe bets. Unfortunately for the bond holders, that is not always the case, as seen with the City of Detroit.
All eyes of municipal financial executives in West Michigan and across the state this week will focus on Oakland County.
That’s because the southeast Michigan county is preparing a $300 million bond issue to refinance existing bond debt to more favorable terms. Importantly, the bond issuance for the county with a AAA bond rating occurs against the backdrop of the City of Detroit’s Chapter 9 bankruptcy filing on July 18.
In the wake of Detroit’s filing, Michigan municipalities including Battle Creek, Genesee County and Saginaw County — all of which have a lower bond rating than Oakland County — put their bond sales on hold as they faced paying more than they had expected or failed to garner much interest from the market.
Those higher rates are in effect a surcharge or “penalty” related to the market’s uncertainty about Detroit’s situation, said Mitch Stapley, chief investment officer at Fifth Third Asset Management. Oakland County’s bond sale scheduled for this week will serve as “a litmus test for the market appetite for Michigan paper,” he said.
The cities that have delayed a bond sale faced a convergence of a few timing issues, Stapley said. For one, summer is a slow season because many investors are on vacation. That’s been coupled in recent months with some volatility in the bond market with some rates creeping upward, Stapley said. When you add in trying to go to market with a bond issuance a month after the largest municipal bankruptcy in the history of the United States, “that’s probably not the best timing,” he said.
The net effect of the Detroit bankruptcy for municipalities in West Michigan depends on the municipality, but it’s safe to say that West Michigan bond issuers “will get a little bit of a ding,” Stapley said.
“The Battle Creeks, Muskegons, Flints and Saginaws will have more difficulty accessing the market,” he said. “Grand Rapids, Holland and Traverse City … will have access to the market. Will they pay a little bit more? Maybe. … As we look at it, it might cost a little more to issue (bonds). You might pay a little more of a penalty, but will you pull the deal? I don’t think so.”
That difficulty in accessing the market caused Battle Creek on Aug. 5 to become the second Michigan municipality to delay a bond sale. The city had been preparing to issue about $16 million in Capital Improvement Project bonds, said Jim Ritsema, Battle Creek assistant city manager.
“We had some money in there for resurfacing linear paths in the city; improvements to Kellogg Arena to make that sustainable; and a Quiet Zone for downtown, which is a project we’d do through the Federal Rail Administration,” Ritsema said.
The last project would require making improvements to eight or nine railroad crossings along the corridor in the city to enable trains to go through Battle Creek without sounding their horns.
Historically low interest rates prompted officials with the city and city commissioners to think about reinvesting in Battle Creek’s capital infrastructure. Ritsema said these projects, in addition to several others, have been put on hold.
“The municipal bond market is pretty much non-existent in Michigan right now,” Ritsema said. “It wouldn’t mean we wouldn’t be able to sell bonds, but at what interest rate?”
Linda Morrison, Battle Creek’s finance director, said Battle Creek has good credit ratings and plans to stand on those ratings.
“We all knew that Detroit was struggling, but we didn’t think there would be a bankruptcy,” Ritsema said. “We need to be evaluated on our own credit. Once this dies down, we’ll proceed and get the bonds sold.”
Less than one week after the bond sale delay in Battle Creek, officials with Saginaw County postponed a $60.55 million pension obligation bond sale. The week before Battle Creek officials announced their decision to delay the bond sale, officials with Genesee County decided to put a hold on the offering of a $54 million water and sewage bond because of low investor interest.
Most economists argue that the bond markets deprive private firms of needed capital. Instead of investing in new technologies or innovations, the bond investors lock their money away to help float municipal government projects. While the private firms create new solutions to make our lives better, and then generate revenues from products or services, municipal governments use bond funds to build parks or recreation centers used by a few citizens. This immediate consumption of funds are a zero sum approach. As soon as it is spent, no further wealth is created. Private firms create exponential wealth by making work and lives easier, freeing up opportunities for greater productivity.
