Moody's Investors Service said it has downgraded to Ca from Caa2 the rating on the Michigan Municipal Bond Authority's Public School Academy Facilities program revenue bonds (Detroit Academy of Arts and Sciences), Series 2001A.

The outlook on the rating remains negative.

The bonds are a general obligation of the Detroit Academy of Arts and Sciences (DAAS), payable from all available revenues of the charter school. The bonds carry a pledge of state aid, which is the academy's only source of unrestricted revenue; monthly installment payments of state aid are transferred directly to the Michigan Finance Authority (MFA) from the state treasurer pursuant to a lease financing agreement.

The MFA is the successor to the Michigan Municipal Bond Authority (MMBA), which had issued the bonds in 2001. The MFA has assigned its rights and interest in the monthly payments to the trustee, the Bank of New York Mellon Trust Company, N.A. (long-term issuer rating Aa1, rating under review).

The downgrade to Ca incorporates both the academy's October 1, 2013, default and the expectation that bondholder recovery is unlikely to exceed 65% of the net present value of remaining debt service payments, based on enrollment and revenue trends.

On October 1, approximately $600,000 was paid out of the academy's revenue account on deposit with the trustee, compared to the total $1.7 million of scheduled principal and interest payment due. Although over $2 million remains in the academy's debt service reserve fund (DSRF), no funds were transferred from the DSRF to complete the October 1 payment.

Moody's ratings represent expected loss, encompassing both default probability and bondholders' likely post-default recovery. When a security is in or approaching default, then placement of the rating will largely depend on the expected recovery to bondholders. Ratings of defaulted bonds with expected recoveries of 65-95% will typically be in the Caa range, 35-65% at Ca, and under 35% at the lowest rating of C. In the rare case when expected recoveries exceed 95%, such ratings will be in the single B range.

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