Detroit received an S&P Global Ratings upgrade to BB-minus from B-plus Thursday in recognition of its stabilizing fiscal picture.
The upgrade which still leaves the city three notches away from investment grade, impacts Detroit’s $135 million, series 2018 unlimited general obligations bonds. The outlook is stable.
"The one-notch upgrade to Detroit's GO rating reflects our view of the city's stabilizing financial position, whereby we feel it is well situated to absorb increasing pension commitments and scheduled increases in debt service in the coming years, as well as possible revenue setbacks, while still sustaining year-to-year budget balance and very strong reserves," said S&P analyst John Sauter.
It's the latest rating agency recognition of the city's fiscal progress since emerging from its historic Chapter 9 bankruptcy in 2014, although deep balance sheet challenges persist.
The upgrade was accompanied with less welcome news.
Because of its changed rating methodology for all priority-lien revenue debt, S&P lowered its ratings on $430 million of Detroit income tax- and user utility tax-supported debt. Under the new methodology, those ratings are capped at two notches above the city's GO rating.
The city’s $245 million financial recovery income tax revenue and refunding local project bonds issued in 2014 were downgraded to BB-plus from A and its $185 million public lighting authority local project bonds issued in 2014 were downgraded to BB-plus from A-minus.
S&P said the two-notch distinction reflects its view that the pledged revenues and the flow of funds are sufficiently removed from the city's control, so as to substantially, but not entirely, mitigate operating risk. Neither the income tax or the user utility tax are collected by the city and in both cases the pledged revenues are transferred directly to independent trustees to meet monthly deposit requirements.
“However we believe that dependence and linkage cannot be entirely overcome through the overlay of a legal structure supporting the bond,” S&P said. “Therefore, despite strong annual coverages and legal provisions in each case, Detroit’s general credit worthiness will continue to weight down the ratings."
“We believe an improved credit rating is a strong reflection that our strategies to improve the quality of life in Detroit are working,” said Mayor Mike Duggan. “Detroit can provide effective public services to its residents only if city government operates in smart, financially sound ways, and that has been our mission from day one."
The upgrade had not immediately impacted trading levels for Detroit GO bonds, said Daniel Berger, a senior market analyst with TM3/MMD and Refinitiv.
Detroit’s $135 million of unlimited GOs issued last December — its first standalone deal since its 2013 bankruptcy — demonstrated the city's ability to access capital markets at competitive borrowing rates, S&P's Sauter said.
“Market access is a significant stabilizing factor for the city's financial trajectory,” Sauter said. “This type of access can help the city more effectively generate funds for needed public investment, while also helping alleviate some burden on the operating budget, which is still funding pay-as-you-go capital."
As part of that transaction the city authorized additional capital projects in the next 18 to 24 months and plans to access the market to fund them.
“We are very careful to balance both the capacity to undertake the project with the need to undertake the project,” said Dave Massaron, Detroit's acting chief financial officer. “So as we get going through the project and we monitor the rate in which we are deploying the capital that we are borrowing and effectively be able to manage that capital in terms of completing projects successfully."
S&P said the city still faces substantial credit pressures, both in the near term and longer term. S&P said stabilization of the population and tax base is key to future budgetary performance and long term viability.
“In our view, the city has positioned the budget to be able to absorb increasing pension and debt service costs in the near term, while relying on conservative revenue estimates and still remain balanced,” Sauter said.
Massaron said the city will continue to work to increase its reserves to make strategic investments so that the economic growth that the city has experienced over the last four years continues. “Given our strong liquidity and positive budget results, it’s important we consider increasing our budget reserve, while also continuing to invest in infrastructure and economic development to help grow our local economy,” he said.
