City of Detroit bonds received an overwhelming positive response from investors in a return to the market Thursday, a clear indication that Detroit is seen as a good investment. City leaders issued the remaining $75 million of the voter-approved $250 million Proposal N (Neighborhoods) bond, a comprehensive plan to address vacant houses through rehabilitation or demolition along with $25M of previously voter-approved bonds for capital. During the pricing, Detroit received nearly $3 billion of orders for its bonds from 67 unique investors or roughly 30 times as many orders as the City needed for its $100 million issue.
Proposal N neighborhood improvement bonds have been a key component in the Duggan administration’s Blight to Beauty campaign. According to Detroit’s Proposal N Demolition and Stabilization Tracker, that only tracks Proposal N activity, 4,239 homes have been demolished to date, while 1,540 have been secured for resell and 941 are being prepped for resell.
The City of Detroit priced $100 million Unlimited Tax General Obligation Bonds, consisting of $52.5 million Series 2023A (Tax-Exempt) Neighborhood Improvement Bonds (Social Bonds), $22.5 million Series 2023B (Taxable) Neighborhood Improvement Bonds (Social Bonds) for property rehabilitation, demolition, and remediation, and $25.0 million Series 2023C (Tax-Exempt) for certain transportation and recreation projects. An estimated 2,500 properties will either be demolished or stabilized with this latest bond offering.
The issuance remains aligned with the Mayor’s announcement of lowering the debt millage from 9 mills to 8 mills in 2023 and an additional reduction to 7 mills in 2024.
Ahead of the deal, the City of Detroit’s financing team led by Chief Financial Officer, Jay Rising met with many investors to market the transaction. As a result of investor meetings and years of effort improving Detroit’s credit, the City generated overwhelming demand for the bonds. The substantial interest from investors made it possible to accelerate the deal a week early and take advantage of a favorable market.
During the pricing process, due to the significant demand for the bonds, the City and its underwriters were able to reduce the interest cost by lowering spreads 25 to 50 basis points across all maturities. “We are very pleased with the outcome of this pricing given the turbulent and high interest rate environment over the last year. The fact that the City of Detroit was able to garner $3 billion of orders at a time when very few issuers with similar ratings are able to enter the market is a testament to investors’ belief in Detroit’s credit story and upward trajectory,” said Rising.
Seizing the Strong Market
Interest rates have risen steeply over the past two years as the Federal Reserve issued ten consecutive rate hikes in its effort to combat inflation, bringing interest rates to their highest levels since 2007. While these rate hikes have generally made debt more difficult and costly due to the higher interest payments, the positive inflation news in last week’s, July Consumer Price Index report produced better than expected results and showed inflation falling to 3.0%--its lowest level since March 2021. The positive news reverberated through the markets as investors reacted favorably, lowering bond yields and creating a window of opportunity the City seized upon to obtain lower interest rates.
Detroit on the cusp of Investment Grade
Rating upgrades from both Moody’s and S&P have continued to recognize Detroit’s strong fiscal management and support the City’s vision behind Proposal N that blight reduction pays dividends to both residents and the City’s finances. In the most recent rating Moody’s highlighted the City’s positive outlook “because of ongoing strengthening of the city's financial operations including robust revenue growth and increasing reserves.” S&P fortified the upgrade stating, “Detroit's financial position and economic condition are the strongest they've been in decades.”
Detroit marketed the 2023A and 2023B Neighborhood Improvement Bonds with the “Social Bond” designation to attract Environmental, Social, and Governance (ESG) focused investors that are interested in financing socially beneficial projects. This follows the 2021 Neighborhood Improvement Bonds which were also marketed as “Social Bonds” and won both the prestigious Bond Buyer Midwest Deal of the Year Award and the Environmental Finance Social Bond of the year award in the US Muni Bond category.
Strong interest from the ESG Funds allowed the City to prioritize placement of bonds with investors supporting the sustainability goals recognized by Proposal N and to lower costs for the City.