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Rating Action:

Moody's assigns A1 senior & A2 second lien to Great Lakes Water Authority, MI's sewer revenue bonds; revises outlook to positive

19 Aug 2022

New York, August 19, 2022 -- Moody's Investors Service has assigned an A1 to Great Lakes Water Authority, MI's Sewer Enterprise's $101.5 million Sewage Disposal System Revenue Senior Lien Bonds, Series 2022A and $10.6 million Sewage Disposal System Revenue Refunding Senior Lien Bonds, Series 2022C and an A2 to its $96.4 million Sewage Disposal System Revenue Second Lien Bonds, Series 2022B. Moody's also affirmed the A1 senior and A2 second lien ratings on the sewer system's existing bonds. Moody's also revised the authority's outlook to positive from stable. After the current sale, the sewer system will have about $1.8 billion of senior lien and $800 million of second lien revenue bonds outstanding.

RATINGS RATIONALE

The A1 senior lien sewer rating reflects the authority's strong operating performance that continues to result in solid annual debt service coverage and robust liquidity. The system is very large, serving the bulk of the Detroit metro area and almost a third of the state's population. Outstanding revenue bonds enjoy sound legal protections and the system has independent rate-setting authority. Member communities, however, recently publicly pushed back on a rate increase aimed at paying the bad debt of Highland Park. This is unlikely to instigate future rate disputes and ultimately resulted in the city of Highland Park beginning to make sewer payments again. The system's debt burden is high and a large share of system-wide revenue is generated by retail operations within the City of Detroit (Ba2 positive).

The A2 second lien rating reflects a subordinate claim on pledged net revenue.

RATING OUTLOOK

The outlook is positive because the authority has strong management and stable operations and its underlying service area continues improve, particularly in the City of Detroit, as well as across Wayne (A3 positive), Oakland (Aaa stable) and Macomb (Aa1 stable) counties.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

-     Sustained expansion and diversification of the service area's economic base

-     Growth in revenue that continues to outpace borrowing so as to moderate leverage of pledged resources

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

-     Renewed economic stress that pressures revenue trends

-     Material reduction to the system's liquidity or debt service coverage ratios

-     Material growth in leverage

LEGAL SECURITY

Sewer revenue bonds are backed by the net revenue of the system. The rate covenant requires projected net revenue coverage of debt service equal to 120% for senior lien bonds, 110% for second lien bonds and 100% for any subordinate lien debt. Per the master bond ordinance, projected net revenue includes the revenue of the respective systems plus any estimated revenue increase from approved rate increases.

The money collected from regional wholesale and local retail customer payments are deposited to a lockbox, which is administered by a third-party trustee. Operations and maintenance (O&M) expenses are defined as cash transfers made to GLWA's and DWSD's respective O&M funds. The revenue and O&M expenses related to GLWA is reported in its segregated business funds while the revenue and expenses of DWSD are accounted for in Detroit's water and sewer funds, respectively. The bifurcated accounting requires adjustments from reported figures to assess rate covenant coverage under the master bond ordinance.

Senior and second lien bonds benefit from debt service reserve funds (DSRF) sized at the lesser of the standard three-prong test.

USE OF PROCEEDS

Proceeds will fund capital improvements Great Lakes Water Authority's regional sewer system, including for wastewater treatment, interceptor system and pump station improvements and to reduce combined sewer overflows.

PROFILE

The Great Lakes Water Authority (GLWA) is the regional wholesale provider of water and sewer services to southeast Michigan (Aa1 stable). The water enterprise treats water from Lake Huron, Lake St. Clair and the Detroit River and distributes treated water to a service area population of about 3.8 million. The sewer enterprise collects, treats and disposes of wastewater produced by a service area population of about 2.8 million. GLWA is an incorporated municipal authority, established in 2016, operating under the guidance of a six-member board, consisting of one appointee each of the counties of Macomb (Aa1 stable), Oakland (Aaa stable), and Wayne (A3 positive), two appointees of the Mayor of Detroit and one of the Governor of Michigan.

METHODOLOGY

The principal methodology used in these ratings was US Municipal Utility Revenue Debt Methodology published in April 2022 and available at https://ratings.moodys.com/api/rmc-documents/386721. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

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Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, 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 issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

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

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

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