CHICAGO - One week after Detroit's emergence from Chapter 9 bankruptcy, Moody's Investors Service has assigned the city an issuer credit rating that's deep in junk bond territory at the B3 level.
Moody's assigned the city a stable outlook. The rating agency has withdrawn its ratings on the city's general obligation unlimited and limited tax bonds and its certificates of participation. The agency had rated the city's GOULT Caa3, its GOLT bonds Ca and COPS a single C. Those bonds are no longer outstanding.
The B3 rating is six levels below an investment grade rating.
"The B3 issuer rating reflects Detroit's improved credit profile and lower risk of near-term default now that it has emerged from its historic Chapter 9 bankruptcy filing," Moody's wrote. "The improvements include a reduction in long-term liabilities and stronger near-term cash flow, as well as significant management and operational changes that are poised to enhance service delivery and stem population decline."
Those gains are countered by the city's challenges that persist including a weak economy and demographic profile, as well as fixed costs related to debt service retiree benefit costs that are projected to consume a substantial portion of post-bankruptcy revenues.
"Further, the city may face difficulties if it experiences even modest declines in the key revenue streams that support general operations," Moody's analyst Genevieve Nolan wrote.
The stable outlook reflects analysts' expectation that the city can resume paying its outstanding debt on time and in full and that its plan of adjustment, if adequately implemented, will improve the city's overall cash position and put it on a potential path of fiscal sustainability.
The city could win an upgrade if it experiences economic improvements, material operating surpluses and cash balances and reduces fixed costs under strong management oversight.
A downgrade could be in the offing should its tax base decline, key revenue sources falter, debt levels rise significantly as a percentage of the operating budget, or the city experiences a trend of operating deficits.
Detroit entered bankruptcy in July 2013 with a Moody's rating of Caa3 on its GOULT and Ca on its GOLT and COPs, reflecting the city's default a few months earlier on COPs and Emergency Manager Kevyn Orr's announcement that debt service payments would be halted on each security.
The city emerged last week from bankruptcy issuing $1.28 billion of new debt that its bond team says required novel financing structures to satisfy both Michigan municipal law and the strict confines of Chapter 9 creditor settlements.
Detroit floated the four deals on Dec. 10, its final day in Chapter 9. The bulk of the proceeds paid off creditors, with some new money for the city's restructuring plan. None of the four bond deals the city closed Dec. 10 were floated on the public markets. Instead the bonds were directly placed with the creditors and participants, though they are securities that can be traded on the markets. The deals are refundings to the extent that they replace existing bonds, but most of the bonds are new credits with new interest rates, maturities, or pledges.
