CHICAGO - Moody’s Investors Service said Wednesday it is monitoring a series of key dates and events throughout 2013 that could impact Detroit’s junk-level credit rating.
Key dates include five debt-service payments scheduled for 2013, elections set for August and November, and the June 30 close of the city’s fiscal year.
The details of emergency manager’s plan to restructure the city’s finances and the outcome of legal challenges to Public Act 436, the state’s newly inked and controversial law for distressed local governments, could also impact the city’s rating, Moody’s said.
“Several recent developments and upcoming events will keep the city of Detroit in the municipal credit spotlight,” Moody’s analyst Genevieve Nolan wrote in the report, “Detroit: A Credit Timeline.” “In addition, there are a number of potential developments that could affect the city’s operations and its credit rating.”
Michigan took over the long-troubled city in March, and state-appointed bankruptcy attorney Kevyn Orr began his 18-month tenure as emergency manager on March 25.
Moody’s maintains a Caa1 rating on the city’s general obligation bonds, with a negative outlook. Fitch Ratings and Standard & Poor’s also maintain junk-level ratings on the city, though Standard & Poor’s raised the outlook to positive from stable on its B rating after the state took over the city.
In its report, Moody’s said Detroit has budgeted for at least four of the five debt-service payments scheduled for 2013. The schedule includes a May 1 payment of $27.6 million for general obligation limited-tax bonds and $4 million on GO unlimited-tax bonds, and a June 15 payment of just under $40 million due on pension certificates of participation.
More GO debt-service payments are due in October and November and a $16.1 million payment is due on the pension COPs on Dec. 15, 2013.
Moody’s warned it could downgrade the city if its expenditures continue to outstrip revenues or if the city takes on additional debt. Any weakening of the state’s authority over distressed local governments tied to court challenges to its current law could also prompt a downgrade, Nolan said.
Termination of the city’s existing interest-rate swaps with two counterparties could also spark a downgrade. Termination events on the swaps, which hedge $800 million of the pension debt, have already been triggered, but city and state officials have been negotiating with the counterparties for at least a year to avoid termination, which would mean the city would owe around $400 million to the banks.
“The city’s liquidity would be significantly impaired if the counterparties terminate the swaps, which could push Detroit into bankruptcy,” Nolan said. “Currently, the city directs revenue received from wagering taxes on a daily basis to a trustee for collateral for the quarterly swap payments due to counterparties.”
The June 30 fiscal-year end will reveal final cash-flow figures and whether current estimates are on target. Cash flow is currently projected to be negative $95.6 million for the year, with year-end cash balance projected at positive $5.2 million.
State law requires that Orr release a restructuring plan within 45 days of his appointment. Moody’s will review Orr’s proposals to tackle the city’s operational and long-term debt woes for any potential credit impact, analysts said.
