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Detroit's $1.8 billion refunding bonds priced in muni market

(Reuters) - Detroit completed the pricing on Tuesday of $1.8 billion of water and sewer refinancing bonds related to a tender offer aimed at dealing with a big chunk of the bankrupt city's debt.

A day after receiving approval from a federal judge overseeing its historic bankruptcy case, Detroit offered the bonds in the U.S. municipal market.

Underwriters led by Citigroup priced $937 million of sewage disposal system senior lien bonds with a top yield of 5.10 percent for term bonds subject to the alternative minimum tax and due in 2044. Yields on insured senior lien bonds topped out at 4.42 percent in 2033, while yields on insured second lien bonds had a top yield of 4.87 percent in 2036.

In a $855 million water supply system bond issue, yields topped out at 4.52 percent for insured senior lien bonds due in 2037. Uninsured senior lien bonds were priced to yield 4.73 percent in 2034, and yields on insured second lien bonds reached 4.87 percent in 2036. The majority of bonds in both issues carry 5 percent coupons.

Nicolette Bateson, chief financial officer of Detroit's water and sewerage department, said officials were "still churning through the process" and would not have any immediate comment on the transactions.

Detroit, which filed the biggest-ever U.S. municipal bankruptcy last year, launched a tender offer on Aug. 7 with the hope of getting enough of the debt back and replacing it with lower-cost bonds through a refinancing. Nearly $1.5 billion of the $5.2 billion of outstanding water and sewer bonds were returned for repurchase by a deadline last Thursday.

If the deals close as expected on Sept. 4, bonds that were not tendered will be paid under current terms.

In the absence of the tender, call protection would have been eliminated or interest rates would have been reduced on "impaired" outstanding water and sewer bonds under Detroit's debt adjustment plan. Those bonds make up about $2.2 billion of the $5.2 billion of existing debt.

The refinancings, which raised money to repurchase the tendered bonds and fund projects, were expected to cut annual debt service costs and result in savings projected at about $241 million over 26 years.

Detroit's treatment of bonds in the bankruptcy, including defaults on certain general obligation bonds and on $1.4 billion of pension debt, roiled the muni market and pushed the city's bond ratings deep into junk territory.

Ratings for the refunding bonds were raised with some still in the junk category and some investment grade.

Most of the bonds priced on Tuesday were insured by Assured Guaranty Municipal Corp or National Public Finance Guarantee Corp, lifting ratings well into investment grade.

The pricing of the bonds came just a week before a key hearing is to start on Detroit's plan to adjust $18 billion of debt. U.S. Bankruptcy Judge Steven Rhodes will determine if the plan is fair and feasible.

(Reporting by Karen Pierog; editing by Andrew Hay)

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