Detroit Public Schools completes $231 million short term cash flow financing, ensuring the district will make payroll, meet obligations

Detroit Public Schools, through the Michigan Finance Authority, priced a $231,000,000 short term cash flow financing today, Thursday, March 3.

The issue was sold in two series, the first, Series 2011 A-1, will be issued in the amount of $120,000,000 at an interest rate of 6.45%, maturing February 20, 2012. The second series, Series 2011 A-2, in the amount of $111,000,000 was sold at a rate of 6.65%, and matures March 20, 2012. The issues pledge a portion of the District’s future State Aid revenues for the repayment of the notes.

“While the rates were higher than we secured on our 2010 notes, we are pleased this sale allows us to make payroll and meet our obligations,” said Robert Bobb, Emergency Financial Manager.

The financing rate was higher than the interest rate the District paid on its cash flow financings issued in 2010. The higher interest rates were the result of a number of factors including the general volatility of the municipal market, concerns over the ending of the District’s covenant not to file for bankruptcy which will end with Bobb’s term as Emergency Financial Manager, recent discussions and plans outlining the drastic cuts that will need to be made in order to eliminate the District’s legacy deficit, and the resulting impact that could have on the District’s future enrollment.

One other main concern cited from potential investors was the potential of the early redemption of the 2005 debt payments which will occur if the District is unable to get the required bankruptcy insulation legislation in place by December 31, 2011, and its impact on the investors. The interest rates on the District’s cash flow borrowings over the past 18 months have ranged from 3.875% to 9.50%.

The proceeds of the sale will be used to fund the operational cost of the District until August 2011.

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