Detroit's first competitive bond issuance draws strong interest

2024
  • The $46.3 million issuance attracted 13 bidders with the award going to Wells Fargo Bank, National Association 
  • Sale capitalizes on Detroit’s return to an investment-grade credit rating earlier this year, having received BBB and Baa2 ratings from S&P and Moody’s respectively  
  • The City achieved substantially lower borrowing costs due to higher ratings: the deal priced more than 100 basis points (equal 1 percentage point)  tighter compared to the City’s 2023 UTGO bonds issuance 

 

The City of Detroit’s first bond sale under its new investment grade status was a huge success, generating strong investor demand and attracting 13 bidders. The issuance on Tuesday also marked the first deal post-bankruptcy for the City using a competitive sale method, which is when bonds are awarded to the bidder that submits the lowest true interest cost bid. The City’s successful sale of $46.3 million in Unlimited Tax General Obligation (UTGO) bonds underscore confidence in Detroit's financial recovery and investment prospects.  

The bond issued represents the remaining voter-approved UTGO bonds which consisted of $22.0 million for Public Lighting, $11.6 million for Transportation, $9.0 million for Recreation, and $3.7 million for Public Safety and Economic Development. Wells Fargo Bank, National Association who submitted the lowest True Interest Cost bid for the bonds received the award. 

The bond sale success is a result of Detroit’s improving credit rating profile. The improved rating combined with the competitive sale method allowed the City to completely reset its credit spreads at significantly tighter levels with its 10-year bonds selling more than 100 basis points (1 full percentage point equals 100) tighter than the results of the City’s 2023 UTGO bonds that priced almost exactly a year ago.  The lower credit spreads translate to lower borrowing costs and will save the City over $4 million in debt service on these bonds. 

"Today marks another milestone for the City of Detroit as we successfully completed our first competitive bond issuance. This achievement highlights our commitment to fiscal responsibility and prudent financial management; seeking ways to benefit Detroit residents at the lowest possible cost The proceeds from this issuance will be instrumental in advancing key infrastructure projects and supporting essential services that enhance the quality of life for our residents. We are grateful for the confidence shown by investors, reflecting our continued progress and positive economic trajectory,” said, CFO Jay Rising.

The issuance remains aligned with the Mayor’s announcement of lowering the debt millage from 8 mills to 7 mills in 2024 and plans for an additional reduction to 6 mills in 2025. 

Leveraging Detroit’s fresh investment grade rating 

Earlier in 2024 the City of Detroit received rare double-double notch upgrades when Moody’s raised its rating from Ba1 to Baa2 on positive outlook in March and S&P followed with an upgrade from BB+ to BBB. These ratings returned Detroit to investment grade status for the first time since 2009 and marked an incredible financial turnaround from bankruptcy in less than ten years. 

Capitalizing on the strong rating news, the City decided to sell its 2024 bond issuance through a competitive sale process.  The City is very pleased by the number of bids received through the competitive sale process and the significant tightening of credit spreads that resulted in further reducing costs and creating savings for Detroit taxpayers. 

A key measure of success for the bond transaction is the final credit spread on the bonds: lower credit spreads mean lower interest rates and a better deal for the City. Detroit’s rating upgrade was likely the most important factor generating strong investor demand for the 2024 Bonds and delivered the best credit spreads in recent history. The credit spreads ranged from 36-76 basis points (bps) and were 70 bps on the 10-year maturity. By comparison, the 2023 transaction had spreads of 138 to 178 basis points with a spread of 178 bps on the 10-year. The City’s 2021 bond deal had previously been the City’s lowest credit spreads thanks to a particularly strong market. Even in 2021, the spread on the 10-year was 55 bps higher than the current sale at 125 bps. 

Christine Fay, Senior Manager Director at Public Resources Advisory Group, Inc, also added “rates received reflect not only the City’s improved credit ratings but also recognition of the City’s improved economic progress and trajectory,” said Fay.

Residents are the true winners today as the bond sales will allow the City to invest in key areas that improve the quality of life for Detroiters including investments in public lighting, transportation, public safety, recreation and economic development.