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Press Release 2014 08 27
August 27, 2014
Gregory Eno (313) 573-0775
Curtrise Garner (313) 701-2147

Market Response to Detroit Water and Sewerage Department Bonds Exceeds Expectations

The market for Detroit Water and Sewerage Department (DWSD) bonds far exceeded expectations on Tuesday, August 26, 2014 in the sale of approximately $1.79 billion of bonds. The investor demand for DWSD bonds was over four times the supply that was available.

Approximately $7.6 billion in orders were received on $1.64 billion of refinancing bonds in addition to approximately $150 million of newly-issued bonds earmarked for sewerage system improvements. The success of this transaction results in a net cash flow savings of nearly a quarter billion dollars ($248.9 million) over the remaining life of the bonds. The high level of investor orders lowered the interest rate when compared to expected savings presented by the City’s Financial Advisor last week.

“Today’s overwhelming response to our bond sale shows our customers that the market’s interest in DWSD should result in greater reinvestment in the system with less reliance on future borrowing”, DWSD Director Sue McCormick said.

There were three key factors that influenced the positive market response.

First, the approval by Judge Steven Rhodes on Monday, August 25, 2014 for this financing transaction to proceed. The collaborative efforts of the DWSD, the Emergency Manager Kevyn Orr, and prior objectors to the impairment of the DWSD bonds in the bankruptcy plan of adjustment signaled an expeditious and productive resolution of the matter.

Second, the DWSD received bond rating upgrades from all three rating agencies. Despite the City of Detroit’s status in Chapter 9 bankruptcy, the fundamental credit strengths of DWSD overcame that challenge. The result was investment grade ratings by two of the three major rating agencies.

Third, the DWSD management team’s effort to reach out to investors. The Department received positive feedback that its responsiveness to existing and new investors contributed to the success achieved today.

The Department hosted an event in the City of Detroit in mid-August with attendees from 23 major investment firms and 35 additional investors who participated by phone. The event included a presentation on the Department’s strategic and financial plan, updates on the Detroit economy by community leaders, and a tour of the sewage treatment plant which is one of the largest sewage treatment facilities in the United States. Following that event, a recorded presentation was viewed 70 times by potential investors. In addition, those efforts were supported by numerous individual conference calls with institutional investors to directly respond to their questions.

Ultimately, approximately 64 institutional buyers participated in the bond sale, including many of the bondholders that responded to the invitation to tender bonds which was approved by the Board of Water Commissioners (BOWC) on Friday, August 21, 2014.


What is a municipal bond tender?

A municipal bond tender is a voluntary process to allow existing bond holders the opportunity to sell their bonds back to an issuer.

What is the net present value savings of this transaction?

The net present value savings is approximately $113.5 million or 6.6%. The present value savings exceeds industry benchmarks of 3 to 5%.

What were the goals of the $1.64 billion refinancing?

The goals of the tender were to achieve meaningful dollars savings for DWSD customers and to seek an open market alternative to the bond impairment outlined in the City of Detroit’s bankruptcy plan of adjustment. Those goals were accomplished thanks to the collaborative effort of the BOWC, the State of Michigan Department of Treasury, the Emergency Manager Kevyn Orr, and the Michigan Finance Authority (MFA). This transaction also occurred with the consent of Judge Steven Rhodes, who approved the financing on August 25, 2014.

How will the newly-issued sewerage system improvements bonds of $150 million be used?

The sewerage system bonds will be used to fund the DWSD five year capital improvement program (CIP). The two largest projects, the bio-solids dryer facility and the incinerator air quality improvement program, are multiple year projects which began construction in 2013. The biosolids dryer facility, presently six months ahead of schedule, will generate land use fertilizer and energy sources as a by-product of the sewage treatment process. The incinerator air quality improvement program refurbishes DWSD’s Complex II Incinerators to achieve compliance with new 2016 air quality regulations. As a result, Complex I incinerators which are at the end of their useful life (50-70 years old) and are non-compliant after 2016 may then be retired. Completion of these projects by March 2016 is critical for the DWSD to ensure regulatory compliance outlined in its National Pollutant Discharge Elimination System (NPDES) permit. The permit is administered by the Environmental Protection Agency (EPA) and Michigan Department of Environmental Quality (MDEQ).

There are additional projects in the current CIP that will be funded by the new bonds, including a sewer lining program to extend the life of those assets. The entire CIP document is available at www.dwsd.org.

What are DWSD’s new bond ratings? What were the ratings when bonds were issued in 2012?

DWSD’s current bond ratings, as of August 25, 2014, are shown in the table below. The uncertainty surrounding the City of Detroit’s Chapter 9 bankruptcy resulted in rating downgrades since the last time that DWSD issued bonds in 2012. It was important to DWSD to realize improvements in the ratings despite the City’s present Chapter 9 status. It is notable that all three agencies provided an upgrade, with Standards & Poor’s granting a “ten notch” increase to investment grade status of BBB+.

Press Release 2014 08 27 Table