Fitch Drops Pontiac, Mich., Debt to CCC

CHICAGO — Fitch Ratings downgraded Pontiac’s debt to CCC this week, warning that the Michigan city could default on some of its outstanding bonds as it struggles with the impact of General Motors’ bankruptcy.

The city, located 30 miles outside Detroit in Oakland County, is already in a state of fiscal emergency, and the state in March appointed a fiscal manager to take over its finances.

Fitch downgraded to CCC $4.4 million of Pontiac Tax Increment Financing Authority revenue bonds, $3.9 million of TIFA revenue and refunding bonds, and $900,000 of limited-tax general obligation bonds, issued by the Pontiac General Building Authority. All of the bonds were sold in 2002.

In April the rating agency downgraded the city’s outstanding water and sewer debt to B-minus from B.

All the debt remains on negative watch for further downgrade.

The bonds downgraded this week rely on revenue generated in two of the city’s tax increment finance districts, which face steep revenue declines as GM prepares to close a plant and pursues an appeal of its property assessments.

“The city faces significant economic challenges that it needs to address to continue to keep paying debt service,” said Fitch analyst Eric Kim. “In our definition of CCC, default is a real possibility.”

One of the city’s top taxpayers, GM has filed an appeal of nearly 80% of its property assessments in Pontiac as well as in a number of other municipalities where it maintains facilities.

The assessment appeals came in conjunction with the automaker’s bankruptcy filing in May.

If the appeal succeeds, Pontiac — and other affected credits — could end up having to give back some of the revenue as well as face lower revenue in the future.

GM maintains several facilities in Pontiac and plans to close a truck assembly plant in October.  The company had also planned to close a metal-stamping plant but decided to keep it open as part of its new small-car initiative, which will be headquartered in nearby Orion Township.

The plant closure will mean a loss of income tax revenue for Pontiac. “To be fair, the city is budgeting for lower revenues on both the income and the property tax side,” Kim said. 

Nearly one-third of the city’s population is unemployed — a figure that is expected to worsen when GM closes the assembly plant — and nearly half of its homes are mortgaged with subprime loans.

Declining revenues and a weak housing market have weakened debt-service coverage, Fitch warned.

Pressure will ease somewhat starting next year when debt-service coverage declines to $2.6 million from $3.6 million in 2009.

If the TIF districts don’t generate enough to pay debt service, the money will come from the general fund, said Fred Leeb, the city’s emergency fiscal manager.

Pontiac is trying to renegotiate its labor contracts and has already laid off a number of employees whose salaries were paid from TIF district revenues, Leeb said.

Moody’s Investors Service’s last rating action on Pontiac was in April 2008 when it dropped to Ba3 the underlying rating on the building authority. Standard & Poor’s has not taken a rating action on the city since 2006.

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