CHICAGO — Standard & Poor's gave an investment-grade rating to a series of bonds Detroit recently sold as part of its exit from bankruptcy.
The investment-grade rating was released Monday, the same day a Michigan authority gave final approval to the distribution of $195 million in state payments to the city's two pension funds under the $800 million so-called "grand bargain" underpinning Detroit's bankruptcy exit plan.
S&P rated A-minus $287.5 million of Series 2014G local government loan program revenue bonds backed by Detroit's unlimited-tax general obligation pledge and a fourth-lien pledge of its distributable state aid. The Michigan Finance Authority sold the bonds as part of the city's exit from Chapter 9 bankruptcy.
The series rated by Standard & Poor's Monday featured a structure that gives bondholders more security than they had in the past and diverted a piece of property tax millage to a new creditor group, as dictated by the city's settlement with its ULTGO holders.
"The rating on the bonds reflects our view of maximum annual debt service coverage dropping to 0.66 times from the constitutional portion of distributable state aid after adding in the fourth-lien bonds and the pledged revenue stream's sensitivity to both city and state economic conditions," said analyst Jane Ridley.
It was one of four deals Detroit issued Dec. 10, its final day in Chapter 9. The bulk of the proceeds paid off creditors, with some new money for the city's restructuring plan.
Standard & Poor's in its report also affirmed ratings of AA on Detroit's closed lien 2010 distributable state aid issue, AA-minus on its second lien 2010 and 2012 issues, and A-plus on the third lien bonds from a 2012 issue. All sold through the MFA.
Outlooks are stable.
Factors that strengthen the new credit and offset some of the weaker characteristics cited include the statutory lien on state aid, a first lien on debt millage from the city's UTGO pledge, and the direct flow of state aid needed for debt payments from the state treasurer to the trustee as well as the direct flow of debt millage directly to the escrow trustee.
Standard & Poor's also views the closure of the fourth lien a positive factor as well as a coverage level of 2.36 times of maximum annual debt service on all DSA bonds when all statutory and constitutional state aid is counted.
"The stable outlook reflects our expectation that state aid distributions to Detroit will not drop significantly, and that coverage for all bonds, including the fourth-lien series, from total state aid revenues will remain adequate," Ridley said. "If delays in the statutory portion of state aid occur, we expect that the legal mechanisms will ensure timely payment of debt service."
The four bond deals the city closed Dec. 10 were directly placed with the creditors and participants, though they are securities that can be traded on the markets.
The $287.5 million UTGO bonds covered the 74 cent-on-the-dollar settlement replacing $330 million of insured ULTGOs, with 26% of the remaining bond payments going instead to retirees.
The bonds will retain the same interest rates and maturities, but were strengthened by the new pledges of the fourth lien on distributable state aid and the specific language that says the debt millage raised for the bonds constitute special revenues. Moody's Investors Service gave the $133.5 million Assured Guaranty-insured portion of the UTGO deal an underlying rating of A3 with a stable outlook. Moody's also rated A3 a $68.8 million portion of the bonds that were insured by National Public Finance Guarantee Corp. Moody's last week assigned Detroit its B3 issuer credit rating with a stable outlook, six levels below investment grade.
The $195 million distribution to two pension funds the Michigan Settlement Administration Authority approved Friday will be made Feb. 9. Legal advice that all claims against the state are resolved related to the city's bankruptcy cleared the way for the distribution approval.
The "grand bargain" provides state and foundation money to fund Detroit's pensions in return for keeping the city's fine art collection in the Detroit Institute of Arts intact.
The state contribution to the grand bargain is coming from tobacco settlement proceeds.
