This piece first published February 29, 2016, Debtwire Municipals

The City of Scranton is closer to issuing its first new bond debt since the default of Scranton Parking Authority bonds in 2012, three sources familiar tell Debtwire Municipals.

The city and unions reached a tentative agreement over a judgment owed to city workers for back pay last week, which paves the way for the city to issue about USD 35m in debt to repay that judgment.

Union membership must ratify the agreement, who will vote when leadership presents the agreement to them. Pending worker approval, the city is expected to issue the debt this summer. Scranton is working with IFS Securities and PFM on the deal.

“We’ve concluded mediation and have a tentative agreement with both (police and fire) unions,” said Dave Bulzoni, the city’s business administrator in an interview with Debtwire Municipals. “We’re looking forward to ratification.”

Some of the proceeds will repay employees directly and fund the city’s pension fund.

The debt will have a unique structure, according to multiple sources familiar. A portion of the bond proceeds will create a three-year debt service reserve account to increase the security of the debt and improve its marketability.

“The deal should be attractive to someone looking for moderate to high yield debt with structured risk,” the first source familiar said.

The city wants to obtain an interest rate below 6%, and would consider variable rate debt and a rate cap to make that happen, according to the first source familiar.

“The city is an improving credit, and there’s definitely interest in Scranton from several institutional buyers,” said a second source familiar.

The state characterizes Scranton’s three pension systems “severely distressed,” underfunded by about USD 150m, with funding ratios between 18% and 32%. The tentative agreement stipulates depositing a portion of the proceeds, between USD 2m and USD 3m to the pension system, the first source familiar said.

There are other transactions planned this year as Scranton works to improve its financial position- a sale of the city’s sewer authority will boost the pension system and monetization of the parking authority will eliminate some of the defaulted debt, as reported.

“I have nothing to report from our meetings with the administration other than it was something that needed to be done,” said Jack Gaffney, president of the Scranton firefighters union, via email. “We are still continuing with the court process at this point.”

The City of Scranton is unrated.

A USD 4.3m tranche of 4.35% Series 2003B general obligation bonds due 2020 last traded in odd lots on 26 February to yield 4.724%.