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Rating Action:

MOODY'S DOWNGRADES RATINGS TO Baa1 FROM A1 ON THE CITY OF DETROIT'S (MI) SENIOR LIEN WATER AND SEWERAGE DISPOSAL DEBT AND DOWNGRADES RATING TO Baa2 FROM A2 ON THE CITY'S SECOND LIEN WATER AND SEWERAGE DISPOSAL DEBT

Global Credit Research - 09 Apr 2012

RATINGS REMAIN ON REVIEW FOR DOWNGRADE

New York, April 09, 2012 -- Moody's Investors Service has downgraded to Baa1 from A1 the ratings on the City of Detroit's water and sewage disposal revenue debt secured by a senior lien pledge of net revenues of each system. Concurrently, we have downgraded to Baa2 from A2 the ratings on the city's outstanding rated water and sewage disposal debt secured by a second lien pledge of net revenues of each system. The ratings remain on review for downgrade.

SUMMARY RATING RATIONALE

The downgrade reflects heightened risk of default and bankruptcy by the City of Detroit (GO rated B2/ rating under review for downgrade) and the potential negative impact those events would have on the water and sewage disposal bonds. Should the city file for bankruptcy, the assets of the water and sewage disposal systems would not likely be subject to an automatic stay, however, the water and sewage disposal systems' assets and finances may not be immune from additional pressure given the city's deteriorating fiscal condition. The rating action also reflects the risk that both systems could possibly be liable for some portion of the city's liability following the recent trigger of a termination event for the city's Certificates of Participation interest rate swap agreements.

The water and sewage disposal system ratings remain under review for downgrade pending our receipt and review of the consent agreement approved by city council on April 4, 2012; the ability of the city to implement an orderly termination of its outstanding sewerage disposal system interest rate swap agreements; and review of recent financial performance of the water and sewage systems. On an audited basis, debt service coverage levels for senior, second and junior lien sewage disposal debt totaled 0.77 times for fiscal 2011. Sewage disposal coverage calculations for fiscal 2011 increases to 0.92 times if certain non-cash items are excluded, but still below sum sufficient and below the required rate covenant. The system raised rates in fiscal 2012.

STRENGTHS:

- Large metropolitan service area

- New model wholesale contract in process of implementation

- Ample water supply and capacity

- Approved annual rate increases

CHALLENGES

- The system maintains a leveraged debt profile with ongoing capital needs that could lead to pressured debt service coverage

- Diminished unrestricted net assets and narrow debt service coverage

- Weak legal covenants

What could change the rating - UP

-- Moderation of above average debt levels

-- Increases in absolute current net revenue and improvement to current debt service coverage levels

-- A material improvement in the system's unrestricted cash and investment position such that the city is better positioned to meet unplanned draws on liquidity

What could change the rating - DOWN

-- Weak operating performance resulting in decreased debt service coverage levels

-- Further increased debt ratio

-- Weakening of the service area through economic forces or wholesale contract changes

-- City defaulting on debt or filing for bankruptcy

The principal methodology used in this rating was Analytical Framework For Water And Sewer System Ratings published in August 1999. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

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:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

MOODY'S DOWNGRADES RATINGS TO Baa1 FROM A1 ON THE CITY OF DETROIT'S (MI) SENIOR LIEN WATER AND SEWERAGE DISPOSAL DEBT AND DOWNGRADES RATING TO Baa2 FROM A2 ON THE CITY'S SECOND LIEN WATER AND SEWERAGE DISPOSAL DEBT
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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