Fitch Ratings last week downgraded to B-minus from B the outstanding water and sewer debt issued by Pontiac. All the city’s debt remains on Fitch’s negative watch.
The move comes a few weeks after Michigan officials declared Pontiac to be in a state of fiscal emergency and appointed a fiscal manager to take over its finances.
Fitch’s action affects $2.9 million in outstanding water bonds and $4.3 million in outstanding sewage revenue bonds.
The water and sewer systems face “severely limited operational and financial flexibility” due to the city’s own fiscal problems, analysts said. “Since the city comprises the vast majority of the service area of the systems, Fitch views the credit quality of the systems to be very closely tied to that of the city as a whole,” analyst Eric Kim wrote in a report.
In recent years both systems have seen a decline in operating revenue and debt service coverage that has fallen below rate covenants. Liquidity for both systems remains “perilously low with just three days of unrestricted cash on hand” as of the end of fiscal 2008, analysts said.
Part of the problem is that automobile business makes up much of both systems’ customer base. General Motors-owned facilities account for more than 10% of billed revenue for both the water and the sewer system, Fitch said.
“Further weakening in the fiscal condition of the city, or of the local economy through the departure, or downsizing, of GM, could adversely impact the systems’ financial results and exert negative rating pressure,” Kim wrote.
But analysts praised system managers for improving efficiencies and replacing outdated meters in recent years.
Fitch rates the Pontiac Building Authority’s debt CCC and maintains a negative outlook. Moody’s Investors Service recently reported it was closely monitoring the city for any impact on its credit. Moody’s last rating action was in April 2008 when it dropped to Ba3 the underlying rating on the authority’s outstanding debt. Standard & Poor’s has not taken a rating action on the city since 2006.
In mid-March the state appointed Fred Leeb, an Orchard Lake, Mich.-based business consultant, to act as emergency financial manager for the city.
