City of Battle Creek, Michigan
General Obligation Limited Tax Bonds, Series 2013
Underlying Rating: AA-/Aa3/AA
Insured by Build America Mutual (BAM)
Sale Date: 09/12/2013
Role of HSE: Sole Manager
On September 12, 2013, Hutchinson, Shockey, Erley & Co. acted as sole manager on a $15.4 million transaction for the City of Battle Creek, Michigan. Battle Creek is the third largest city in Michigan by area, after Detroit and Grand Rapids. It is also currently the home to the Kellogg Company headquarters.
This was the first local Michigan general obligation bond issue greater than $10 million since the city of Detroit filed bankruptcy on July 18. Initially the deal was slated to price in early August; however, because of uncertainty as to how the market would receive a GO bond issue from a Michigan municipality in the wake of Detroit’s filing, the issuer decided to delay the pricing. This uncertainty was fueled by the comments of Detroit’s Emergency Manager, who suggested that general obligation debt could be treated as unsecured debt, on par with all other unsecured obligations. The postponement of the pricing was a prudent response to market conditions at the time.
The bonds had a final maturity in 2033 with term bonds in 2025, 2027, 2030, and 2033. Coupons ranged from 2-5%. Bonds due in 2033 were priced to yield 5.23%. The structure featured a five-year call option in 2018 which provides the City with the ability to refund the bonds for savings sooner than the standard 10-year call. The total interest cost was 4.86%.
At the onset of the three-day premarketing period, HSE’s sales team received feedback from several investors suggesting the use of bond insurance in order to provide an additional source of security. After evaluating the costs and benefits of such a strategy, HSE decided to use Build America Mutual (BAM) insurance in order to enhance liquidity and broaden the distribution of the bonds.
On the day of pricing, HSE saw strong investor interest and bumped preliminary pricing levels by as much as 10bps from the pre-marketing price thoughts and another 7bps after the order period, for a total reduction in yield of 17bps on the final maturity. The transaction attracted 41 unique investors, ranging from mutual funds to trust departments to asset managers. There were no Tier 1 investors involved in the transaction, as all the bonds were placed with clients in HSE’s specialty market of Tier 2, Tier 3 and Tier 4 participants. The breadth and depth of the investor participation in this transaction exemplify HSE’s considerable distribution capabilities.
The transaction was significant for several reasons. First, the decidedly positive market response indicated institutional investors’ acceptance of a local GO credit in Michigan after the uncertainty created by the Detroit bankruptcy filing, which some feared would have a considerable effect on Michigan transactions. Additionally, the spreads at which the issue was priced illustrated very little post-bankruptcy penalty imposed upon a Michigan issuer, even with a five-year call option attached to the securities. Finally, the use of BAM insurance on the transaction demonstrates the market’s returning support for the use of credit enhancement, which after 2008 has played a little role in the bond market.