Sept 29 (Reuters) - The Michigan Finance Authority issued nearly $226.4 million of bonds on Thursday to refund Detroit Public Schools debt secured in part by state aid revenue that was subsequently diverted, according to the Michigan Treasury Department.
The transaction leaves the original bondholders paid in full, the department said.
The authority privately placed the refunded debt with JP Morgan Chase Bank at a net interest cost of 3.78 percent, the state treasury said in a statement. The transaction refunded bonds originally sold in 2011 and 2012 and secured by the Detroit Public Schools' (DPS) operating property tax levy and its share of state aid.
Under a Michigan law that took effect on July 1, the school system was split into two entities. DPS is responsible for paying off debt using its property tax levy. State aid revenue was funneled to a new community district charged with operating schools.
The law was aimed at rescuing the financially struggling school system, which has been under state control since 2009.
Uncertainty over how owners of the original limited-tax general obligation bonds would fare due to the weakened payment pledge led S&P Global Ratings earlier this month to drop the bonds' ratings deeper into the junk level.
Jane Ridley, an S&P analyst, said Thursday that bondholders emerged unscathed as a result of the refunding.
"That credit cliff is gone," she added.
Moody's Investors Service also cited uncertainty over the bonds when it revised the outlook on DPS's Caa1 credit rating to developing from negative on Sept. 14.
Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis