CHICAGO - As Wayne County, Mich. scrambles to stabilize its finances, the roughly $200 million of bonds it issued in 2010 for a new downtown Detroit jail could be particularly vulnerable to default, Fitch Ratings warned in a new downgrade report.
The jail bonds are more vulnerable than other of the county's debt in part because the jail project remains half-finished and a political hot potato for the cash-strapped county that has its seat in Detroit, said Fitch.
The debt, issued as taxable stimulus bonds in 2010 through the Wayne County Building Authority, carries the county's limited-tax general obligation pledge and is not subject to abatement or appropriation, Fitch noted.
"Our concern is that if the squeeze continues to get tighter and tighter and if there is a state intervention, or if there is eventually a Chapter 9 filing, that debt could politically be vulnerable," Fitch Ratings analyst Arlene Bohner said.
Bohner's comments follow Fitch's downgrade of the county on March 12.
Fitch pushed its LTGO bonds to B from BB-minus and downgraded its implied unlimited-tax GO pledge to B from BB.
Fitch also kept the county on negative watch, meaning another downgrade could come within six months unless the county is able to implement a realistic deficit elimination plan.
It was the third downgrade in the last four weeks for Wayne, which is Michigan's most populous county.
It lost investment-grade ratings from both Standard & Poor's and Moody's Investors Service in February. The downgrades followed the release of a Ernst & Young audit, ordered by new county Executive Warren Evans, that showed the county could be out of cash by June 2016 and face a cash crisis by July 2016.
The half-built jail is one of the many headaches Evans inherited when he took office in January.
The county in 2010 issued $200 million of taxable stimulus to finance the project, which would consolidate the county's aging three jail facilities into one in downtown Detroit.
The budget quickly escalated from an estimated $390 million from $220 and in the summer of 2013 officials halted work.
In September 2014, a grand jury indicated former county chief financial officer Carla Sledge and two others with misconduct in office and willful neglect of duty. The jury said Sledge lied to the county board and the building authority about the finances.
Debt service payments come from cash rental payments from the authority to the county.
"Fitch believes that they're legally obligated to pay that debt just as they are legally obligated to pay their other GO bonds issued directly by the county," Bohner said.
She said the recent Ernst & Young report separated the jail debt from other long-term debt, and that sparked concern for Fitch.
"The fact that the jail project never got built may make it vulnerable in a political sense, and the recent Ernst & Young report raised the question for us," she said. Fitch talked to county officials about the bonds and they said "they are not considering stopping payment on that debt," Bohner said.
In an email to The Bond Buyer, a spokesman for Evans also said that the county "will continue, as it always has, to meet its debt service obligations."
Evans has said he is still deciding how to proceed with the project.
In a column published in the Detroit Free Press on March 13, Evans stressed that the county is legally obligated to continue to make payments on the jail bonds.
"Wayne County pays about $17 million a year for a partially built jail that we can't use," he wrote, apparently referring to debt service costs of roughly $14 million as well as additional storage fees. "Unfortunately, selling the Gratiot site does not relieve the county of this obligation. This yearly cost will be an obligation of the county until the bonds sold to finance what has been built so far are paid off."
He also suggested that finishing the project may be the best solution if the county can borrow the additional $100 million, which it's authorized to do under the original 2009 borrowing legislation.
But that solution might take some time to achieve, Evans said: "When your house is burning, it's not the time to develop your plans for rebuilding."
The bulk of the $200 million of taxable bonds -- $143.3 million - feature a 2040 maturity and a 10% coupon. The bonds were yielding 10.2% in Friday trading, according to EMMA. That's up from a 7.5% to 8% yield in January trading,