CHICAGO - Moody's Investors Service upgraded Detroit Thursday by one notch to B2 from B3, keeping the credit deep in junk-bond territory, as the Motor City gears up for its first public bond sale since its bankruptcy exit.
Moody's also revised its outlook to positive from stable, saying it expects the city to continue to benefit from new and improved budgeting and operations practices as well as economic development.
The upgrade applies to Detroit's unlimited-tax general obligation bonds, not to the bonds the city is selling in a few weeks, which are backed by a pledge of income tax revenue.
Moody's upgrade is the second piece of good ratings news in two days for the long-struggling city. On July 29, Standard & Poor's assigned an A rating and stable outlook to the upcoming income-tax bonds, which are expected to price on Aug. 19, and assigned a junk-level B rating as the issuer credit rating.
Moody's said its upgrade reflects a series of improvements across Detroit, which only last December exited the largest municipal bankruptcy in the U.S.
"The upgrade to B2 reflects the city's improved financial position following its exit from bankruptcy," Moody's said in the report. "The rating also incorporates management's continued improvement of city financial operations and signs of economic development in the city. Offsetting these factors are persistent tax base weakness, with continued population loss and taxable valuation declines that are expected to continue over the near term."
The positive outlook signals another upgrade could be on the horizon. Moody's listed several factors that could prompt an upgrade, including improvements in the local economy, material operating surpluses and improved unrestricted cash balances, strong management oversight of operations, and reductions in fixed costs.
Potential downgrade factors include continued declines in tax-base valuation, an economic downturn that affects key revenue sources, increases in fixed costs or debt, and an elimination of legislative authority for state oversight. The city is currently overseen by a state-appointed financial review board, one of the requirements for the state money that helped settle the bankruptcy case.
