CHICAGO - Standard & Poor's Tuesday downgraded Detroit's nearly $5.9 billion of water and sewer bonds, pushing the already junk-rated debt to CCC and warning another one could be on the horizon.
"We lowered our rating because we view the obligations as currently vulnerable to nonpayment," Standard & Poor's analyst Scott Garrigan said in a press release. "In Standard & Poor's view, the city's plan of adjustment indicates that the treatment of the water- and sewer-related debt classes could involve an exchange offer where investors receive less value than the promise of the original securities. We view such an exchange as tantamount to a default." Detroit's bankruptcy plan calls for a restructuring of the nearly $4 billion of existing debt to generate savings. The move requires current bondholders to waive their call provisions. Early redemption without some kind of compensation to bondholders fits S&P's definition of default, Garrigan said in an interview.
The downgrade comes as the city's quest to privatize the Detroit Water and Sewerage Department moved into another stage this week.
Detroit last Friday issued a request for proposal for private companies interesting in running the system, one of the largest in the country. Interested firms have until April 7 to respond to the RFP. The move comes after a months-long effort to negotiate a new regional authority with the city's three adjacent counties stalled. Oakland and Macomb Counties are reluctant to take on the costs of operating the system, and say they have not received adequate financial information.
"My whole thought is that they need to look to the private sector," said Mark Hackel, Macomb County executive. "[Detroit emergency manager] Kevyn Orr is trying to figure how to monetize the water system. They're trying to find a revenue stream to satisfy their creditors and the city, so why would we agree to that?" The city unveiled its plan of debt adjustment in February. Orr has said he is treating the water and sewer bonds as secured debt. But he wants to restructure the debt to achieve savings, either through a new regional authority or through the state. The city needs current bondholders to agree to the restructuring plan for it to move forward.
The Michigan Finance Authority in mid-March put out a request for underwriters for a new $150 million deal in June. The RFP indicated that a restructuring of the entire debt portfolio is a possibility in the context of the city's bankruptcy.
In keeping the bonds on credit watch negative, S&P signaled another downgrade could come within 90 days.
"We could remove the rating from credit watch, or even raise the rating if we determine that there is a diminished likelihood of an exchange offer involving less value than the original promise " Garrigan said. "In determining this, we will consider the answers to additional information as we consider appropriate, based on our criteria."
Fitch Ratings on Feb. 28 downgraded the debt three notches to junk bond status. Analysts cited weak financial performance and uncertainty stemming from the city's Chapter 9.
S&P and Moody's Investors Service both sent the water and sewer bonds to junk last July, before the city's bankruptcy filing.
