Fitch Ratings hit Detroit with its third downgrade in as many weeks when it cut its rating on the city’s $2.4 billion of outstanding debt late Thursday.
The downgrade puts all the financially troubled city’s debt firmly in junk-bond territory.
Fitch cut its rating to BB from BBB on $530 million of unlimited-tax general obligation bonds and to BB-minus from BBB on $314 million of limited-tax GOs. Another $1.5 billion of pension certificates of participation was downgraded to BB from BBB.
At the same time, Fitch maintained its negative watch on the city’s credit in case Detroit is required to make termination payments tied to interest rate swap agreements stemming from $800 million of pension COPs. The termination event was triggered by Standard & Poor’s recent downgrade of the city to below investment grade.
City officials have estimated the possible payments to be around $400 million and said last week that they had hired a pair of public finance law firms to address fallout from the downgrades.
Standard & Poor’s downgraded Detroit’s debt on Jan. 10 and Moody’s Investors Service cut its rating three days later. All three rating agencies cited the city’s ongoing deficits, chronically late audits, and weak economy as factors behind the downgrade.
“The combination of a large accumulated deficit, the absence of reliable data on which management can base future budgetary decisions, and the strong possibility that the current tenuous economic situation will weaken further lead to Fitch’s belief that the city’s credit profile is no longer consistent with an investment grade rating,” analyst Amy Laskey wrote in a report on the downgrade released late Thursday.
