Detroit Attempts To Sell $250 Million In Bonds Without Financial Disclosure Via Goldman
Here comes the first municipal Hail Mary: Detroit is attempting to sell $250 million in debt, while disclosing in the associated prospectus of the possibility of filing for Chapter 9
bankruptcy protection. The kicker as Bloomberg News reports - no recent financial statements are available. In fact, Detroit is providing investors with a a financial statement from June 30, 2008, with a fiscal 2009 report
"expected" to be complete by May 31. To say that a lot has changed in the past two years for the city whose unemployment some say is in the double digits with a 3 handle, would be an understatment. Yet we are confident that having no access to actual financials will not stop investors who in their feverish quest of Return On Capital are completely forgetting about the Return Of Capital concept.
“This issue is not for the faint of heart,” said Richard
Ciccarone, chief research officer of Oak Brook, Illinois-based
McDonnell Investment Management, which oversees $6.8 billion of
municipal debt. “It certainly raises eyebrows.”
Detroit will provide backing by payments of state aid from
sales taxes to the general obligation issue, which enabled the
issue to maintain investment grade. Michigan’s state treasurer
can pay the aid directly to the trustee for the bonds, bypassing
the city to ensure the debt is serviced, according to offering
documents. The treasurer also agreed not to withhold payments
when the city is late filing financial statements, as it has in
And just who is the bank that is confident it can pull the wool in front of its clients' eyes? Why Goldman Sachs of course.
Detroit is selling $250 million of bonds through investment
banks led by Goldman Sachs Group Inc. to help cover budget
deficits expected to total $280 million this year. The deal will
probably appeal to investors seeking high-yield municipal debt,
predicted Ciccarone, precluding the city from a market with tax-
exempt yields near three-month lows.
Not too surprisingly, Detroit will end up paying a spread evern greater than Greece
Detroit general obligations maturing in 2024 traded
yesterday at a yield of 7.56 percent, according to Municipal
Securities Rulemaking Board data. That compares with yields of
3.36 percent to 3.5 percent for top-rated 14-year municipal debt yesterday, according to Municipal Market Advisors Inc.
This is the lunacy of CDOs all over again, when every Tom, Dick and Harry would park their capital into whatever was being pitched to them by Goldman persistent , having no idea about the actual investment, with Goldman most certainly buying up CDS on Detroit just after the closing of the auction, for "hedging purposes" (and no, that in itself will not push Detroit into bankruptcy: at best it will make the imminent solvency crisis come faster and be more painless).
Detroit is not alone as munis slowly but surely become the next subprime. On deck as offerings by Florida, California, Massachussettes, and variety of other municipal issues.