RATINGS REMAIN ON REVIEW FOR POSSIBLE DOWNGRADE
New York, March 20, 2012 -- Moody's Investors Service has downgraded to B2 from Ba3 the City of Detroit's
(MI) $553.1 million of outstanding general obligation unlimited
tax (GOULT) debt, and has also downgraded to B3 from B1 the city's
$486.4 million of outstanding general obligation limited
tax (GOLT) debt. Moody's also downgraded to B2 from Ba3 the Detroit
Retirement Systems Funding Trust 2005's $520.2 million of
outstanding Taxable Certificates of Participation (COPs), Series
2005A; and the Detroit Retirement Systems Funding Trust 2006's $948.5
million of outstanding Taxable COPs, Series 2006A and Series 2006B.
The COPs are secured by the city's unconditional contractual obligation
to pay debt service, which is not subject to annual appropriation.
The ratings remain under review for possible downgrade.
SUMMARY RATINGS RATIONALE
The downgrades are based on the city's weakened financial position,
as evidenced by its narrow cash position, reliance on debt financing
to stabilize operations and ongoing labor concession negotiations,
both of which are yet to be secured and will aid in maintaining a positive
cash position. Although efforts to stabilize the city's finances
and improve liquidity are ongoing and could be resolved over the very
near term, protracted discussions continue and this uncertainty
increases bondholder risks. The state continues its in-depth
review of the city's finances, which could result in bringing
the city one step closer to bankruptcy filing. Finally, recently
filed audited financial results for fiscal 2011 confirm our expectation
of continued financial strain, with a sizable operating deficit
and a large negative General Fund balance.
Maintenance of the rating on review for downgrade is based on two remaining
challenges facing the city's path to fiscal stability over the near
term that may more likely than not put additional stress on the credit.
First, the ongoing effort to repeal the current state oversight
law may result in either diminished state authority or result in an absence
of a state oversight framework until a vote on the repeal is held.
However, it should be noted that signatures for the repeal effort
have yet to be certified and there is the possibility of replacement legislation
if the current law were suspended. Additionally, the downgrade
of the rating of the COPs to below Ba3 constitutes a termination event
under revised swap terms that became effective June 2009. Under
such a termination event, the counterparties could trigger a termination
payment, payable over seven years, which would further complicate
the city's ability to manage its cashflow over the medium to longer
term.
STRENGTHS
-Diverse revenue base for the General Fund
-Strong state oversight provided by Michigan Public Act 4
-Recent resurgence of domestic automakers, resulting in hiring
across the metro Detroit region
CHALLENGES
- Weak liquidity profile, requiring active cash flow management
techniques including debt refinancing to meet operating needs
-Ongoing inability to achieve structural balance in the General
Fund
-Significant, ongoing General Fund support for the Transportation
Fund
-Potential termination payment due for swap agreements issued in
conjunction with Series 2005 and 2006 Certificates of Participation
-Declining population base and resulting service delivery issues
for a smaller population spread across a wide base
-Ongoing state review of the city's finances, which
may result in appointment of an emergency manager which is the first requisite
step to filing for bankruptcy
Outlook
Maintenance of the rating on review for downgrade is based on two remaining
challenges facing the city's path to fiscal stability over the near
term that may more likely than not put additional stress on the credit.
First, the ongoing effort to repeal the current state oversight
law may result in either diminished state authority or result in an absence
of a state oversight framework until a vote on the repeal is held.
Additionally, the downgrade of the rating of the COPs to below Ba3
constitutes a termination event under revised swap terms that became effective
June 2009. Under such a termination event, the counterparties
could trigger a termination payment, payable over seven years,
which would further complicate the city's ability to manage its
cashflow over the medium to longer term.
WHAT COULD CHANGE THE RATING - UP
- Material operating surpluses, achieved through structurally
balanced financial results that will carry forward to future fiscal years
- Sustained economic improvement coupled with revenue enhancements
- A material improvement in the city's unrestricted cash and investment
position such that the city continues to be less dependent on cash flow
borrowing
WHAT COULD CHANGE THE RATING - DOWN
- Revenue challenges that continue to exceed expenditure (and alternate
revenue) solutions
- Continued operating deficits leading to heightened cash-flow
weakness
- Further increase of the city's leveraged position
- Economic performance which would be unable to sustain revenue
growth or revenue stability
- Increase in likelihood of either a bankruptcy filing or plan
to default on debt obligations
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was General Obligation Bonds
Issued by U.S. Local Governments published in October 2009.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
Although this credit rating has been issued in a non-EU country
which has not been recognized as endorsable at this date, this credit
rating is deemed "EU qualified by extension" and may still
be used by financial institutions for regulatory purposes until 30 April
2012. Further information on the EU endorsement status and on the
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Genevieve Nolan
Analyst
Public Finance Group
Moody's FIS Domestic Sales Office - Chicago IL
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Henrietta Chang
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
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MOODY'S DOWNGRADES DETROIT (MI)'s GENERAL OBLIGATION UNLIMITED TAX AND CERTIFICATE OF PARTICIPATION DEBT TO B2 AND GOLT DEBT TO B3
