CHICAGO — Moody’s Investors Service put Detroit’s already junk-rated unlimited tax general obligation bonds and $4.6 billion of A1-rated water and sewer debt on review for possible downgrade.
The rating action Wednesday came a week before the city plans to come to market with nearly $500 million of water refunding bonds. Detroit will use roughly $210 million of the proceeds to shed costly interest-rate swaps.
Moody’s warning follows Michigan’s move this week to launch a preliminary review of the city’s finances. A preliminary financial review is often a first step toward appointment of an emergency manager, which would heighten the risk that Detroit would file for bankruptcy protection. It would also trigger interest-rate swap terminations that could cost as much as $400 million, Moody’s warned.
“The city faces a heightened risk of filing for bankruptcy should an emergency manager be appointed,” Moody’s said in the negative watch report. Analysts added that a bankruptcy filing is a “low risk” but “nonetheless has a rising probability.”
However, state Treasurer Andy Dillon last week downplayed the possibility of bankruptcy. “From the numbers I’ve seen, the city can fix its problems and can function going forward,” Dillon told reporters during a conference call. “I don’t see bankruptcy in the future.”
No city in Michigan has ever filed for bankruptcy.
Moody’s maintains a Ba3 rating on Detroit’s unlimited-tax GO bonds, which total roughly $450 million. It gives a B1 to the city’s $486 million of limited-tax GO debt.
The city has an additional $1.5 billion of certificates of participation issued in 2006 to pay off pension liabilities. Interest-rate swaps hedge $800 million of those bonds and could be terminated if the state appoints an emergency manager. The counterparties are UBS and Siebert Brandford Shank & Co.
Moody’s assigns a rating of A1 to the senior-lien water and sewer bonds and A2 to the subordinate-lien water and sewer bonds, and warns that those revenue bonds are also endangered by Detroit’s vulnerable fiscal position.
“The city’s water and sewer enterprise ratings are placed on review given that they are city-owned and may not be completely immune to the risks associated with a city bankruptcy filing,” analysts said.
Moody’s noted that the future of the state’s new emergency manager law is uncertain as a movement is underway to put a question on the November 2012 ballot that would repeal it. State officials said they believe that if the law is temporarily suspended — which would happen as soon as the measure’s supporters gather enough validated signatures to get it on the ballot — the old emergency financial manager law would be revived.
State Treasury officials will spend up to the next 30 days examining Detroit’s finances, and if they find evidence of fiscal stress, they will recommend a more formal review to Gov. Rick Snyder. The governor would then appoint a review team that could take up to 60 days to examine the city’s finances before recommending that the state either do nothing, appoint an emergency manager, or enter into a consent agreement with local officials.
Dillon said the state decided to launch the process this week because a recent audit showed that the city could run out of cash by April.
All three rating agencies maintain below investment-grade ratings on Detroit. Fitch Ratings in June downgraded the city two notches, pushing its unlimited-tax GO ratings to BB-minus and limited-tax GOs to B-plus. It also cut its rating on pension certificates of participation to BB-minus. Fitch rates the senior-lien water and sewer bonds A and the subordinate-lien water and sewer bonds A-minus.
Standard & Poor’s maintains a BB rating with stable outlook on Detroit’s GO debt and A-plus and A-minus ratings on the senior-lien and subordinate-lien water and sewer bonds, respectively.
