CHICAGO - Hit with a string of downgrades, Detroit officials said yesterday they have hired a pair of public finance law firms to help deal with fallout from the loss of its investment-grade credit that includes the possible demand for $400 million in swap termination payments.
The announcement followed Moody's Investors Service's move Tuesday to strip the city's $530 million of unlimited-tax general obligation bonds of their low investment-grade rating by downgrading the debt to Ba2 from Baa3.
Detroit's $355 million of limited-tax GOs were knocked further down into junk bond territory to Ba3 from Ba1.
The rating agency also downgraded the rating to Ba2 from Baa3 on roughly $1.5 billion of outstanding pension certificates of participation and warned that further action could result if the city is forced to make swap termination payments.
Moody's action comes one week after Standard & Poor's put Detroit's GOs two notches into junk territory along with the city's outstanding COPs to BB. That downgrade triggered a termination event in the city's interest-rate swap agreements that it has with counterparties on roughly $800 million of its outstanding pension certificates.
Fitch Ratings, in response to the possible termination event, placed its BBB rating on the Detroit's GOs on negative watch.
Moody's and Standard & Poor's cited the city's poor fiscal condition, ongoing budget deficit, and late audits as top reasons for the downgrade.
Mayor Ken Cockrel Jr. said Tuesday that the city had hired Lewis & Munday and Orrick, Herrington & Sutcliffe LLP to deal with challenges posed by the downgrades.
"We have retained the best legal counsel on public finance issues to help the city through this difficult process," Cockrel said in a statement. "We continue to meet on a daily basis to develop an appropriate course of action."
While some reports said the city would announce plans to deal with the deficit and possible termination payment this week, mayoral spokesman Daniel Cherrin said any announcements would more likely come in the next few weeks, in part because the city's top leaders will head to Washington next week for President-elect Barack Obama's inauguration. Cherrin declined to provide information regarding the city's proposals to reduce its deficit or negotiations with its counterparties to stave off the termination payment demands.
In a report on its downgrade, Moody's cited a number of fiscal challenges facing the city. They include its accumulated deficit - estimated by the city at $300 million - as well as negative general fund balances, chronically delayed audits, and weakness in the regional economy that's likely to keep revenue down for the next several years.
Analysts also cited the city's increased reliance on short-term borrowing for cash flow purposes. Moody's said all ratings have been put on watch for further downgrades in light of the potential liquidity risk posed from possible termination of the swap agreements related to the outstanding pension certificates.
Detroit entered into the floating-to-fixed-rate insured swap agreements as part of the Detroit Retirement System Fund's issuance that includes $948.5 million of taxable COPs from a 2006 transaction and $536 million of taxable COPs that it sold in 2005.
The city's counterparties on the transaction are UBS AG and SBS Financial Products Co., which is part of Siebert Brandford Shank & Co. Under the swap agreements, the counterparty can terminate the agreements in the event that the COPs' ratings are withdrawn, suspended, or stripped of their investment grade by one of two rating agencies, and at least one rating agency drops the insurers' ratings to below the low-single-A category.
UBS spokesman Doug Morris did not have a comment on the firm's position on the termination payment and Siebert officials did not return calls seeking comment.
