CHICAGO – The state-backed restructuring of Detroit's public school system is a positive development for existing bondholders, says Moody's Investors Service.
Moody's offered that assessment in a report published Wednesday that digs into the benefits and risks associated with debt repayment following the restructuring that was completed July 1. The overhaul left the old Detroit Public Schools system, which carries an issuer rating of B2 with a stable outlook, intact for the sole purpose of collecting its levies to repay more than $2 billion in obligations.
The new Detroit Public Schools Community District operates schools and will receive future state aid payments under the $617 million restructuring backed by Gov. Rick Snyder and state lawmakers.
"The split of DPS into two legal entities is a credit positive for bondholders of existing DPS debt. Reforms provide a framework making it more likely the district will retire its outstanding obligations," Moody's wrote.
"DPS' improved, but still weak, credit profile is rooted in freedom from typical school district operating expenses, dedicated levies to retire liabilities, and a demonstrated commitment by the state to ensure debt payments are fully made," analysts added.
Remaining risks include a weak property tax base and collection levels, high direct debt, and liabilities from overlapping entities -- mainly the city of Detroit, which is rated at the same junk level of B2 with a stable outlook.
"The most significant bondholder risk is a Chapter 9 bankruptcy filing," Moody's warned. "Overlapping obligations of the city of Detroit, particularly as the city's pension payments balloon in 2024, could require further attempts to restructure at the city or district level to mitigate taxpayer burden."
Offsetting some concerns was the state's willingness to intervene and rescue the distressed district with passage of the $617 million restructuring that bolsters aid over 10 years. It demonstrated "a commitment to avoiding a bankruptcy filing," Moody's said.
Moody's upgraded DPS' issuer rating to B2 from Caa1 last month in recognition of the impact of the restructuring and the successful refinancing of DPS's $226 million of general obligation state aid revenue bonds in September. Moody's does not assign an underlying rating to the old DPS debt, only an issuer rating.
The Michigan Finance Authority refinanced DPS' outstanding general obligation state aid revenue bonds through a private placement with JP Morgan Chase. An existing operating levy of roughly $50 million to $60 million per year will go to pay off debt service on the refunding bonds. The refinancing resolved the fate of the 2011 and 2012 bonds amid worries over how they would be repaid after the restructuring shifted pledged state aid to the new district.
The restructuring also lays the groundwork for a fresh start for the new district. "Stakeholders are optimistic that the freeing of resources, combined with a recent stabilization in enrollment, will enable NewCo to achieve structural balance while at the same time improving educational outcomes," Moody's noted.
Moody's does not anticipate issuing an issuer credit rating on the new district, which has no debt.
