Business
10:31 am
Mon August 19, 2013

Who will buy Detroit Schools bonds?

The opportunity to buy bonds from a troubled school district run by an emergency manager, in a city that's just filed for bankruptcy, may seem akin to the opportunity to get your hands on some great snake oil, or a big lot in a Florida swamp, cheap.

But one municipal bond portfolio manager thinks Detroit Public Schools' bond offering, expected tomorrow, could actually be a good deal.

"There's an extraordinary amount of interest in buying short maturity bonds with high yield," says Josh Gonze of Thornberg Investment Management based in Santa Fe, New Mexico.

Gonze says the Detroit school bonds are likely to offer a really attractive interest rate - perhaps as much as 5.0%.  And the bonds are being issued for only one year.   Consider that the average AAA-rated ten-year municipal bond right now is offering .25% interest - that's not a typo -  and you'll see why some investors might nibble, or bite, at this particular lure.

Gonze says everybody interested in municipal bonds right now is discussing Detroit's bankruptcy.  It has caused an already anxious investment community to become even more jittery.

"Whenever there's a train wreck like Detroit, one reaction from some investors is just to flee.  To run away, I don't want anything to do with it."

That could explain why Battle Creek, Genessee County, and Saginaw County had to withdraw their planned bond sales recently for lack of interest.

But, Gonze says other investors' panic is an opportunity for cooler heads.  "Even I know there are plenty of healthy cities" in Michigan that are worth investing in, he says. 

He says the high interest rate for Detroit's bonds has more risk than usual - but less than many people might think.

That's because the bonds are backed by the state's school aid funds.  Gonze says if the school district were to go bankrupt, the state aid funds would go to paying off the bondholders first.

Gonze predicts the  bonds will sell.  The offering by the Michigan Financial Authority is expected Tuesday.