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Detroit schools stung with sky-high interest rates

A 'Welcome to Detroit' border sign is seen as traffic enters Detroit, Michigan August 3, 2013. Picture taken August 3, 2013. REUTERS/Rebecca
A 'Welcome to Detroit' border sign is seen as traffic enters Detroit, Michigan August 3, 2013. Picture taken August 3, 2013. REUTERS/Rebecca

By Michael Connor

(Reuters) - Detroit's school system got a tough lesson from America's $3.7 trillion municipal bond market when investors demanded and obtained sky-high interest rates on debt issued just a month after the city filed the nation's biggest-ever municipal bankruptcy case.

The $92 million of one-year state aid revenue notes sold through the Michigan Finance Authority came with a whopping 4.375 percent coupon and priced at par, according to a pricing sheet from lead manager JP Morgan Securities.

The yield on the Detroit school notes, which were rated SP-1 by Standard & Poor's Ratings Services, was almost 22 times the yield triple-A-rated Columbus, Ohio, got for $19.8 million of one-year limited tax notes it sold on Tuesday. Those notes were priced with a yield of 20 basis points and a 2 percent coupon.

"It has Detroit in the name, and there's some headline risk," said Dominic Vonella, a Municipal Market Data analyst.

Like Detroit, the city's school district is run by a state-appointed emergency manager and is beset with substantial financial problems aggravated by long industrial decline. Detroit's city government on July 18 filed for Chapter 9 bankruptcy court protection, reporting more than $18 billion of liabilities.

Michigan Treasurer Andy Dillon, who oversees the state Finance Authority, said he was pleased with the results of the debt issuance, which was well-oversubscribed with $600 million of orders from 30 firms.

"The level of investor interest in the transaction continues to demonstrate the strong demand for Michigan investments," Dillon said in a statement.

A school district spokeswoman did not immediately respond to a request for comment on the deal.

Some other local Michigan issuers have delayed planned debt sales in recent weeks because of a shoot-up in yields since the Detroit filing, which has spooked some retail buyers. Tax-free yields are at two-year highs.

The Detroit school district notes are backed by promised state revenue due the school system but on a subordinate basis behind certain senior lien obligations, according to a preliminary offering statement for the sale.

On Tuesday, trading in the secondary market was light and spotty. Many maturities on MMD's scale of AAA-rated issues were unchanged while other, mostly near-term maturities declined enough to lift yields by as many as 6 basis points. Most changes were smaller.

Both the benchmark 10-year and 30-year maturities on the MMD scale remained flat, with the 10-year staying at 2.90 percent and the 30-year ending at 4.40 percent.

(Reporting by Michael Connor in Miami and Karen Pierog in Chicago; Editing by Matthew Lewis and Ken Wills)

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