Michigan State Credit Insulated from Detroit, Raters Say

CHICAGO -- As Michigan comes to market this week with $30 million of general obligation refunding bonds, ratings analysts said the state continues to rebound after a decade-long recession and appears well protected against fallout from the bankruptcy of its largest city.

This week’s borrowing, a competitive sale set for Wednesday, will be Michigan’s second since Detroit filed for Chapter 9 on July 18. The first sale, of transportation refunding bonds in late August, reportedly attracted a number of hedge fund investors, market participants said at the time.

Two of the three major ratings agencies have a positive outlook on the Wolverine State, and all three praise it for a growing economy, improving fund balances and liquidity and moderate debt. The state also seems financially insulated from Detroit’s problems, as Gov. Rick Snyder has said repeatedly that state dollars are not on the table, analysts said.

“The state’s made very clear when we’ve talked to the administration that they’re not going to put state money into the bailout, if there is one,” said David Hitchcock, an analyst at Standard & Poor’s, which rates the state AA-minus with a positive outlook. “There’s not going to be an extraordinary support.”

The state’s support of Detroit’s treatment of its unlimited-tax general obligation bonds as unsecured doesn’t play into the ratings firm’s state credit analysis, Hitchcock added.

“We rate to the likelihood of default, and we’re not including what’s happening with Detroit as part of our legal analysis of the security of the state of Michigan’s GOs,” he said. “As a state, they can’t declare bankruptcy anyway, so different issues would apply.”

Fitch, which upgraded the state to AA from AA-minus last April, reiterated its previous comments that Detroit’s treatment of its ULTGOs is unexpected, but said the decision is not expected to influence Michigan’s credit.

“The concern that we’re noting [about ULTGO] is explicit to Detroit, and we’ve noted in other publications that might lead us to look at the GOs of other Michigan local governments, but not the state or its GOs,” Fitch analyst Douglas Offerman said.

“Our understanding is that the state is not offering Detroit any special assistance,” he said. “Michigan is a very large economy and the Detroit metropolitan region is a very large economy,” Offerman added. “The state itself has had a relatively strong comeback in recent years from a decade-long period of weakness, and that’s had a significant benefit to the state’s finances overall.”

Moody’s Investors Service, which rates the state Aa2 with a positive outlook, warns that exposure to financially struggling local governments like Detroit could pose a challenge to the state, but it’s a limited one.

“Providing extraordinary state financial support to Detroit would require approval by the state legislature, which appears unlikely,” Moody’s said in its report. “Even if Detroit’s severe budgetary challenges are not addressed in the context of a bankruptcy proceeding, there is no evidence the city’s fiscal crisis will trigger state budget burdens in the form of extraordinary financial support.”

The upcoming bond issue features $30 million of taxable GO environmental program refunding bonds that mature in 2015. Miller, Canfield, Paddock and Stone PLC is bond counsel. Robert W. Baird & Co. is the state’s financial advisor.

Michigan has $2.1 billion of outstanding GO debt.

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