CHICAGO — Moody's Investors Service dropped its rating on Detroit's $1.5 billion of certificates of participation to C from Ca, saying proposed settlements with insurers would put recoveries well below 35%.

Moody's announced the downgrade Oct. 20, a week after the bankrupt city reached a settlement with Financial Guaranty Insurance Co., which insures $1.1 billion of the certificates.

Syncora Guarantee Inc., which holds nearly $400 million of the debt, settled with the city several weeks ago.

The ratings agency had warned in early October it may downgrade the debt depending on the terms of the settlements.

The agreements both feature a mix of cash and Detroit real estate and, in Syncora's case, two long-term asset leases.

The cash recovery for both insurers is around 13%.

"Reported terms of the FGIC settlement, along with the Syncora settlement terms laid out in the city's Seventh Amended Plan of Adjustment, support our expectation of a recovery rate falling well below the 35% to 65% recovery rate range that would be consistent with a Ca rating," analysts said in a brief report on the downgrade.

Moody's noted that the Detroit City Council has already approved the Syncora deal. The council is expected to vote on the FGIC deal later this week, but city officials have the option of going to the state emergency loan board for approval if the council rejects the deal. The bankruptcy court must still approve both deals.

The $1.5 billion of COPs have been one of the most controversial aspects of Detroit's Chapter 9. The city in January sued to invalidate the debt, saying it was illegally issued in 2005 as a way to circumvent state-imposed debt limits. Detroit agreed to drop the lawsuit as part of the FGIC settlement.


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