Standard & Poor's Ratings Services said it has lowered its ratings on Michigan Finance Authority's series 2011 revenue bonds to A from A-plus and series 2012 revenues bonds to A-minus from A-plus, both issued for Detroit Public Schools.
The outlook is negative.
The bonds are payable from the repayment of loans made by the authority to the district. The district's loans (the amended and restated series 2011A district notes--which secure the series 2011 bonds--and the 2012 multiyear repayment obligation, which secure the series 2012 bonds) are secured by all appropriated annual state aid to be received by the district.
The district has irrevocably assigned 100% of its pledged state aid to the loans (and thereby to the authority's bonds). The district's 2011 obligation holds a first-lien pledge of state aid, and the 2012 obligation a second lien. The district's limited-tax general obligation (GO) pledge also secures both obligations.
The ratings reflect the strength and structural features of the district's state aid pledge to its obligations.
"The downgrade is based on severe declines in the district's enrollment, and subsequently, pledged state aid available to pay debt service," said Standard & Poor's credit analyst John Sauter. "The district's continued overall financial and liquidity deterioration is another contributing factor."
Despite both liens of state aid securing the district's obligations being closed, the rating agency lowered the rating on the series 2012 bonds to one notch below the rating on the series 2011 bonds, as the combined first- and second-lien coverage has declined, and is no longer at levels it considers to be highly comparable to the first-lien coverage.
