Fitch Ratings last week downgraded its rating to BBB-minus from BBB-plus on three series of tax-increment financing bonds issued for Detroit’s downtown business district. The Detroit Downtown Development Authority issued the debt in 1998. The outlook remains negative.
The downgrade affects TIF bonds issued for development area No. 1, located within the city’s Downtown Development District. Area No. 1 consists of 615 acres and encompasses most of the downtown business district, including General Motors’ headquarters, according to Fitch analysts.
The district also includes three casinos, stadiums for the Detroit Lions and Detroit Tigers, and Detroit River waterfront development. The area represents 8% of the city’s total taxable value.
The bonds are secured by a pledge of all tax-increment revenue captured by Area No. 1.
The downgrade comes as the incremental taxable value generated by the district continues to slip. Analysts said it is projected to fall 19% in fiscal 2011, a precipitous decline that could mean a drop in pledged revenue as well.
“Given the sharp decline, Fitch is concerned about the future direction of the tax base,” analyst Amy Laskey wrote in a report on the downgrade.
If the decline in captured revenue slows, debt-service coverage should remain at or above 1 times maximum annual debt service for the life of the bonds, according to Laskey.
“However, should pledged revenues fall below 1 times in any given year, the debt-service reserve fund’s availability to cover shortfalls is unclear given that it is funded by a surety provided by MBIA Insurance Corp.,” she wrote.
Fitch said it expects the tax base to continue to erode — prompting the negative outlook — but at a slower pace than in 2011.
Future declines are expected to be less severe in part because of the stabilization of GM as well as other major downtown taxpayers.