CHICAGO — Fitch Ratings yesterday removed Detroit’s debt from negative watch following the resolution of its swap-related difficulties, and affirmed the city’s negative outlook that reflects a weak balance sheet and economy.
Fitch put Detroit’s debt on negative watch in early January based on the possibility that the city would have to make large termination payments — up to $400 million — to its swap counterparties after the city was downgraded.
The removal of the watch comes after officials closed with counterparties on amended swap agreements in late June.
At the same time, Detroit still faces a myriad of financial and economic problems.
“The negative outlook is based on the potential for further deterioration in the city’s very weak financial and economic profiles,” Fitch analysts Amy Laskey and Melanie Shaker wrote in a release issued yesterday. “Both have continued to weaken recently.”
The move affects $587 million of unlimited-tax general obligation debt, now rated BB, $233 million of limited tax GO debt, now rated BB-minus, and $1.5 billion of Detroit Retirement Systems Funding Trust certificates of participation, now rated BB.
The resolution of the city’s swap-related headaches came after several months of negotiations with counterparties UBS AG and SBS Financial Products Co. Under the amended agreements, Detroit put up its casino revenue as collateral to back its swap payments. It places those revenues with a custodian, and once the city makes its $4.2 million monthly fixed-rate swap payment from its general fund, the casino revenues are released.
Fitch noted that a swap termination, currently estimated at around $200 million, would be triggered if the casino tax revenue fell below 1.75 times coverage. It is now above three times.
“Fitch believes that the coverage level is likely to decline moderately but that excess revenue provides a satisfactory cushion,” analysts wrote.
Like Michigan, which Fitch downgraded to A-plus from AA-minus earlier this month, Detroit has been hard hit by the bankruptcies of General Motors Corp. and Chrysler LLC. The city’s unemployment rate spiked in May to just under 25% compared to 15.4% a year earlier. The city’s general fund deficit is now estimated to reach more than $250 million, aggravated by falling revenues.
“Further significant financial deterioration in fiscal 2010 or failure to achieve progress toward reducing the accumulated deficit in the 2011 budget would likely trigger a downgrade,” Fitch warned in its report.
Other problems facing the cash-poor city include a high debt burden of approximately 15% of market value, poor financial reporting, and political turmoil stemming from a revolving door to the mayor’s office, with three mayors in the past year and another election planned for November.
Standard & Poor’s rates the city’s unlimited-tax GO debt BB with a stable outlook, and Moody’s Investors Service rates it Baa2 with a negative outlook.