Detroit and Puerto Rico Come to the Muni Market: One Pays the Price and the Other Is Snubbed

This week, Detroit and Puerto Rico dipped their toes back into the muni market. Detroit’s first issue since it exited bankruptcy last December was a deal issued through the Michigan Finance Authority, secured by a first lien on the city’s income tax revenues. S&P Rating Service rates the bonds as upper medium quality, or “A,” which is significantly better than the underlying B2 rating of the city’s general obligation debt provided by Moody’s. The reason for the higher rating is that the Michigan governor signed legislation providing special first lien status to bondholders. Despite the special first lien status, Detroit still had to pay a significant premium to borrow money after exiting bankruptcy. Bloomberg News reports the bonds maturing in 2029 priced about 200bps cheaper than the AAA municipal curve at a yield of about 4.5%.

While Detroit was able to generate interest in its new debt, Puerto Rico has faced more resistance to its attempt to market bonds issued through the Puerto Rico Aqueduct and Sewer Authority (PRASA). Although PRASA has had relatively strong financial performance, and provides a first lien for bondholders on pledged revenues from an essential service with gross coverage at nearly 5x debt service, it has not been able to generate sufficient interest even with yields in the 9.5% range. The struggle Puerto Rico faces in marketing its debt stems from uncertainty regarding its intention to restructure its debt. While commonwealth officials have indicated that PRASA debt would not be subject to the restructuring, the market has balked at those assurances, particularly after Puerto Rico skipped a debt service payment on August 1 on one of its bond issues.  As with most commonwealth debt, PRASA is rated near default levels in the CCC range.   

Sources: Moody’s, S&P