S&P Global Ratings said it lowered its rating on Detroit Public Schools (DPS), Mich.'s series 2011 and 2012 bonds secured by state school aid and a limited tax general obligation (GO) pledge to B from BB and BB-minus, respectively.
The ratings are no longer differentiated by lien level, given both series are equally affected by impending loss of the state school aid revenue pledge on Oct. 1. The ratings remain on CreditWatch with negative implications, where they were placed March 10.
When an obligation is rated B, the obligor currently has the capacity to meet its financial commitment on the obligation, S&P said. However, adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
"The downgrade is based on the lack of a finalized plan regarding bondholder repayment terms following the district's recent restructuring, and the resultant elimination of a pledged revenue stream at the end of the state's fiscal year," said S&P credit analyst Jane Ridley. Although the Michigan Finance Authority's intent is to take out the existing debt at full value, the rating agency said, as October looms closer and ushers in the new fiscal year, it creates greater uncertainty as to whether bondholders will receive full and timely payment on their bonds.
