CHICAGO — Detroit's tender offer program for $5.2 billion of water and sewer bonds is not a distressed debt exchange, Fitch Ratings said in a comment Thursday.
Fitch weighed in on the city's tender offer hours ahead of a 5 p.m. ET tender deadline. As of late morning, holders had agreed to sell off $1.39 billion of the bonds.
Detroit has asked investors holding up to $5.2 billion of the Detroit Water and Sewer Department bonds to tender the debt to allow the city to refinance the bulk of its debt portfolio to achieve savings. Key to the savings would be the city winning higher ratings on the now-junk-rated debt.
Fitch is the first ratings agency to weigh in on the deal, and its belief that the tender program not a distressed debt exchange may bode well for higher ratings on the refinanced bonds.
"The tender offer is not an attempt to avoid a payment default or default on other terms of the DWSD bonds," Fitch said in the comment. "The proposed treatment in the POA was intended to create an opportunity to call bonds at par that are not currently callable, to achieve savings, and to facilitate a potential conversion of DWSD to a regional utility or, more remotely, a privatized utility. It was not motivated by any financial distress within the DWSD itself," analysts said. "The tender offer is not conditioned on the tendering bondholders agreeing to any amendments to the indenture that would impair the rights of non-tendering holders."
Fitch noted that Detroit's offered tender prices, most of which are more than 100 cents on the dollar, are meant to reflect current market prices.
The city has said it would only refinance the debt if enough bonds are tendered, but has not named an amount. Preliminary bond documents for the refinancing, released Wednesday, also do not name an amount. The city has also said it may try to directly purchase the debt if the tender program fails.
"If the tender process is completed, Detroit will amend its [plan of adjustment] and list all DWSD Bonds as unimpaired," Fitch noted. "Detroit intends to currently refund the tendered bonds that are purchased. Detroit has a conditional commitment from financial institutions to purchase the refunding bonds used to pay the purchase price. Bonds that are not tendered will not be altered and will continue to be entitled to payment of scheduled principal and interest according to the original terms."
Fitch currently rates the DWSD's senior and subordinate Bonds 'BB+' and 'BB', respectively, and has the debt on rating watch negative.
