Fitch Ratings said it upgraded the following city of Detroit and Michigan Finance Authority bonds issued for the Detroit Water and Sewerage Department (DWSD): $1.2 billion in senior lien water revenue bonds to BBB from BBB-minus; 585 million in second lien water revenue bonds to BBB-minus from BB-plus; $1.8 billion in senior lien sewer revenue bonds to BBB from BBB-minus; and $698 million in second lien sewer revenue bonds to BBB-minus from BB-plus.
The rating outlook is stable.
Senior lien water and sewer bonds are separately secured by a first lien on net revenues of each respective water and sewer system (the systems). Second lien bonds are separately secured by a second lien on the net revenues of each respective system after payment of senior lien bonds.
The one-notch upgrade reflects DWSD's ongoing actions to produce greater revenue stability and improve operational efficiencies, including improvement in current collections. As a result, financial results are largely on target despite above average precipitation during fiscal 2015. Forecasted results beyond fiscal 2015 have been revised upward modestly.
All system funds and accounts are separate and distinct from other city funds including the city's general fund. The planned lease of the systems by Great Lakes Water Authority (GLWA) provides further assurance that system operations will remain independent of the city.
The systems' debt load is expected to remain elevated for the foreseeable future as a result of relatively high near-term borrowing. Over the longer term, it is envisioned a greater use of pay-go capital funding will alleviate debt pressures to some degree.
The systems provide essential services to a broad area. The water system covers about 38% of Michigan's population, with over 70% of operating revenues coming from wealthier suburban customers. The sewer system includes roughly 28% of Michigan's population, with over 50% of operating revenues coming from suburban customers.
The governing bodies have instituted virtually annual rate hikes in support of financial and capital needs. Continued annual adjustments are included in the forecast but the pace of growth should be less than in prior years.
