NEW YORK - Moody's Investors Service said it has downgraded to Caa2 from Caa1 the rating on Michigan Municipal Bond Authority's public school academy facilities program revenue bonds (Detroit Academy of Arts and Sciences), Series 2001 A & B.

Moody's has also assigned a negative outlook to the rating, removing it from the watchlist. The current action affects $26.8 million in outstanding debt.

The bonds are secured by monthly installment payments of state aid revenues transferred directly to the Michigan Municipal Bond Authority (MMBA) from the state treasurer pursuant to a lease financing agreement.

The MMBA has further assigned its rights and interest in the monthly payments to the trustee.

The downgrade to Caa2 reflects the likelihood that the academy will eventually default on its outstanding bonds, though such a default is not expected to occur in the immediate term.

Should default eventually occur, it is Moody's expectation that the bondholder would assume a loss in excess of 10% of the net present value of outstanding debt service.

The rating also incorporates a statutory limitation on the availability of state aid revenues to pay debt service and the dependence of state revenues on school enrollment. The rating further reflects the uncertainty regarding the sale or lease of academy property, the revenues of which would be directed to the trustee to make debt service payments.

Assignment of the negative outlook reflects Moody's expectation that, given eventual default on the bonds, the loss to the bondholder could ultimately exceed 20% of the net present value of outstanding debt service.

The loss could be mitigated, if not averted, by the academy's ability to sell or lease its former high school facility and use that revenue to repay the bondholder.

Whether or not such a sale or lease could be successful, as well as the magnitude of potential revenues, is uncertain, particularly given the state of the Detroit real estate market.

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