CHICAGO - Standard & Poor's assigned an A rating and stable outlook to Detroit's first post-bankruptcy bond sale, set for Aug. 19.
The investment-grade rating announced Wednesday marks a major victory for the junk-rated city, which is trying to rebuild its credit after defaulting on its general obligation bonds and filing for the largest municipal bankruptcy in the U.S. While assigning an A rating to the income tax-backed bonds, S&P assigned the Motor City itself a junk-level B issuer credit rating.
Mayor Mike Duggan was set to hold a press conference announcing the new rating Wednesday afternoon.
The investment-grade rating on the forthcoming bond deal, nine notches above Detroit's issuer rating, reflects enhancement provisions.
The $245 million of bonds feature a statutory lien on the city's income tax and an intercept feature that will route 90% of collections to the bond trustee before releasing the rest of the revenue to the city. Michigan Gov. Rick Snyder in April signed into law the bill creating the statutory lien and intercept, measures designed to ease the city's first capital markets appearance since its high-profile 2013 bankruptcy filing.
In its ratings report, S&P said it based its rating on the lien, the intercept, coverage that is projected to total 6.5 times or higher, and a statute that provides that the revenues held by the trustee are exempt from being levied upon, taken, sequestered or applied to any other debts other than the bondholders'.
Risks associated with the income-tax bonds include a dedicated transfer of the income tax to support the police operating budget, which is superior to the pledge on the bonds and makes up about 8% of the total tax collections, according to Standard & Poor's.
Other offsetting factors include the concentrated nature of the income-tax base, with more than 90% of collections coming from 40 employers and the city's history of "extreme prior credit stress" that includes the nation's largest-ever municipal bankruptcy.
The ratings agency also noted that income tax collections have dropped to $275 million in 2014 from $322 million in 2004, though they've increased annually since 2010.
Despite major structural changes enacted during bankruptcy that include the shedding of significant amounts of retirement and bond debt, the city continues to face pressures, S&P said. S&P said its B issuer credit rating reflects a very weak economy, very weak management, and weak budgetary performance and flexibility. The outlook is stable.
"We feel Detroit will continue to be challenged to deliver the services residents need and address the backlog of capital and other needs a large city has," the firm said in its ratings report. "In our view, doing both of these things simultaneously is critical to spurring the economic improvements the city will need to make in order to be a viable entity long term. Detroit's ability to maintain balance while transitioning away from a consultant-run government will also be a critical step in demonstrating it can survive economically and financially."
Investor presentations set for the first two weeks of August ahead of the Aug. 19 pricing.