CHICAGO – Detroit's old water and sewer debt is investment-grade across the board for the first time since the city left bankruptcy.
Moody's Investors Service fully restored all the bonds – now obligations of a new regional authority – to investment grade Tuesday.
The Great Lakes Water Authority, which opened its doors this year, is now the obligor for the $5.5 billion of water and sewer revenue debt.
Moody's lifted $617 million of junior-lien water bonds and $17.3 million of junior-lien state revolving fund water bonds two notches to Baa2, from junk-level Ba1, and raised $908 million of second-lien sewer debt and $465 million of junior-lien SRF sewer bonds to Baa2 from Ba1.
Senior-lien debt, already at investment grade, was also upgraded two notches, to Baa1 from Baa3, affecting $1.7 billion of senior water bonds and $1.9 billion of senior lien sewer revenue bonds.
Outlooks are stable.
The upgrade recognizes GLWA's assumption of all the debt secured by the net revenues of the Detroit Water and Sewerage Department. GLWA manages regional water and wastewater services, assets, and handles rate-setting responsibilities, while Detroit retains control of water and sewer services within city limits. The lease gives GLWA sole ownership interest in revenue generated by the combined regional and local system.
"This significantly limits the risk that a future bankruptcy filing by the city of Detroit or intensified fiscal pressure on the city in general would contribute to bondholder impairment with respect to the water revenue debt," Moody's wrote in its report late Tuesday.
The ratings also reflect the massive scale of water operations and a customer base that extends beyond Detroit's borders, very strong operational and fiscal management, healthy liquidity, and the expectation of stable or improved debt service coverage, Moody's said. The rating agency rates Detroit's debt B2 with a positive outlook.
The low investment grade ratings also recognize the credit's challenges, such as high leverage of pledged revenue, extensive capital needs, and labor market and demographic weaknesses.
An improved regional economy and stronger liquidity and debt service coverage could further boost the rating. Economic reversals or a weakening of liquidity and debt service coverage or an over leveraging of the system's net revenues could hurt the rating.
The water system treats water from Lake Huron, Lake St. Clair and the Detroit River and distributes treated water to a service area population of about 3.8 million. The sewer system treats and disposes of wastewater produced by a service area population of approximately 2.8 million.
A majority of Detroit water and sewer bondholders late last year gave their consent to the transfer of the Detroit Water and Sewerage Department's bonds to GLWA. A selling point was the likelihood of upgrades and legal insulation from Detroit, which exited its historic Chapter 9 bankruptcy in late 2014.
While the DWSD had enjoyed mostly independent operations from the city, its debt was still dragged into the bankruptcy process.
Bond insurers Assured Guaranty Municipal Corp. and National Public Finance Guarantee Corp. wrap much of the debt.
The city's restructuring plan laid the groundwork for the new authority long talked about by regional officials. Former Detroit emergency manager Kevyn Orr's desire to monetize the city's water and sewer assets drove negotiations and the city's plan of adjustment to exit Chapter 9 laid the groundwork, with bondholder consent clearing the path.
As part of GLWA's 40-year lease with Detroit, the city will receive $50 million a year to overhaul its aging infrastructure as well as $4.5 million in assistance for low-income customers.
The new agency has said it doesn't expect any new money borrowing until fiscal 2017 but is eyeing refunding opportunities. The GLWA board is comprised of six board members: two from the city and one each from Wayne, Oakland and Macomb counties, plus one representing the state.
Fitch lifted the junior-lien water and sewer debt to investment grade in September 2015. Standard & Poor's restored investment grades in August 2014.
