CHICAGO — Standard & Poor's said Friday Detroit's bankruptcy will not affect the way it rates general obligation bonds.
Detroit's original treatment of its GO debt as unsecured had prompted questions over whether some of the ratings agencies would revamp their GO rating criteria.
But less than an hour after a federal judge approved Detroit's bankruptcy debt plan, S&P released a report saying the historic Chapter 9 case would have no impact on its ratings, because no legal precedents were set in the case and the ratings agency's current criteria warns of weaknesses before default.
"In the end, despite months of headlines and court battles, ultimately the outcome of the Detroit bankruptcy will not have an impact on our GO ratings," analyst Jane Ridley said in a statement. "This view is based on our feeling that there was no precedent set that is widely applicable to GO debt, and that the forward-looking nature of our U.S. local government criteria gives us opportunities to identify and take into account such weaknesses before issuers reach the point of deciding who to pay and not pay, either via bankruptcy or default."
S&P did warn that Detroit's recovery could run into challenges.
"The Chapter 9 route has proven costly for Detroit, as it has for so many others, and its effectiveness at righting its ship upon emergence from bankruptcy remains in question," the ratings agency said. "As Detroit enters post-bankruptcy, it will be challenged to generate cost savings through operational restructuring while addressing a backlog of infrastructure and other needs.
"Although the roadmap is set out in the plan of adjustment, it will still likely be difficult for the city to continue making the kinds of changes that will lead to the cost savings it needs to be operationally balanced. We believe that achieving this is the only way that Detroit will be able to stay out of bankruptcy again in the future."
