DALLAS -- Detroit Public Schools' $212 million of state aid-backed bonds slipped two to three notches further into junk territory over uncertainty tied to the bonds' security after a restructuring of the school district.
S&P Global Ratings Tuesday downgraded the 2011 bonds to B from BB and the 2012 bonds to B from BB-minus. The rating agency said it's no longer going to distinguish the bonds by lien level given that both the series 2011 and 2012 would be equally impacted by the impending loss of the state school aid revenue pledge on Oct. 1, 2016.
"The downgrade is based on the lack of a finalized plan regarding bondholder repayment terms following the district's recent restructuring, and the resultant elimination of a pledged revenue stream at the end of the state's fiscal year," said analyst Jane Ridley said in a report.
The rating drop marks the third action taken by S&P in as many months. On Aug. 4, S&P lowered the 2011 first lien bonds three notches to BB from BBB and the 2012 second lien bonds to BB-minus from BBB-minus. The action followed a three-notch downgrade of the bonds in July after the new district formally opened its doors under a state-approved restructuring that split the district into two entities.
The state's backing was the only reason the bonds had previously garnered A-level ratings. The district's underlying ratings are junk-level.
The former district, referred to as Old Co, remains intact solely to continue to collect its tax millage and repay its tax-backed bonds and will become the obligor of the state aid bonds Oct. 1 when the aid shifts to the new district that operates schools.
State aid can only flow to school districts with students, so the only remaining fundable pledge backing the bonds when the state starts its next fiscal year will be the district's limited tax GO pledge, which is not rated by S&P.
State Treasury officials have said the restructuring of the state aid bonds won't impair principal but they have yet to disclose details of the restructuring.
"Treasury continues to work on a private placement financing plan to refund the DPS Series 2011 and Series 2012 bonds," said Danelle Gittus, a Treasury spokesperson. "It is Treasury's full intent and expectation that the financing will be completed by October 1. Per the notice to investors, they will receive no less than par at the time of refunding."
Officials with the new Detroit school district were not immediately available to comment.
"Although the Michigan Finance Authority's intent is to take out the existing debt at full value, in our view, as October looms closer and ushers in the new fiscal year, it creates greater uncertainty as to whether bondholders will receive full and timely payment on their bonds," said Ridley.
DPS was formally divided into two separate entities on July 1 under a $600 million state package approved this year by state lawmakers to stave off a potential bankruptcy filing as the district grappled with insolvency. The new Detroit Public Schools Community District operates schools and will receive the future state aid payments that had secured the 2011 and 2012 bonds. The bonds also carry a limited tax general obligation backing.
The ratings remain on CreditWatch with negative implications reflecting the possibility that further hits could result if a redemption, refunding, or defeasance is not undertaken in a timely manner.
