In June 2013, Detroit's Emergency Manager announced the city would not make upcoming debt service payments and was poised to file Chapter 9 bankruptcy should settlements with creditors not be reached quickly.
Since then, Standard & Poor's Ratings Services has followed the proceedings and, in the commentary published Friday titled "Why Detroit's Bankruptcy Plan Outcome Doesn't Affect U.S. Municipal General Obligation Ratings," discusses the bankruptcy's potential impact on general obligation (GO) and similarly supported ratings.
"In the end, despite months of headlines and court battles, ultimately the outcome of the Detroit bankruptcy will not have an impact on our GO ratings," said Standard & Poor's credit analyst Jane Ridley. There was no precedent set that is widely applicable to GO debt, and the forward-looking nature of the agency's U.S. local government criteria gives it opportunities to identify and take into account such weaknesses before issuers reach the point of deciding who to pay and not pay, either via bankruptcy or default.
Standard & Poor's has long said it expects to see pockets of stress, and outright distress, in U.S. local governments. "However, we believe our criteria allow us to identify and adjust ratings in distressed situations, and also to differentiate between different kinds of GO and GO-like pledges," Ridley said.
Specifically, its U.S. local government GO criteria include forward-looking analysis and, when combined with rating caps, appropriately address the types of distress that are most likely to result in significant credit deterioration.
