Moody's Investors Service said it has downgraded the city of Detroit's general obligation unlimited tax (GOULT) rating to Caa2 from Caa1 and its general obligation limited tax (GOLT) rating to Caa3 from Caa2.
Moody's also downgraded the city's certificates of participation (COPs) rating to Caa3 from Caa1. The GOULT, GOLT and COPs ratings have all been placed on review for possible downgrade.
Concurrently, Moody's has downgraded the ratings for Detroit's water supply system revenue bonds and sewage disposal system revenue bonds each one notch to Ba1 (senior lien) and Ba2 (second lien) as the growing probability of a city bankruptcy filing potentially increases bondholder risks. Ratings for Detroit's Water Supply and Sewage Disposal enterprise revenue debt have also been placed on review for possible downgrade.
The downgrades reflect the increased likelihood of a bankruptcy filing, a major general debt restructuring, or a combination of the two, following the appointment of the emergency manager (EM) in March 2013 and the EM's recent pronouncement that Detroit's current liabilities require significant restructuring to ensure the city's long-term financial health.
Should default or bankruptcy occur, the recovery levels for bondholders could potentially be quite low based on recent municipal recovery rates for other distressed local governments. The EM and his staff are reportedly planning to meet with creditors and stakeholders to commence negotiations for restructuring the city's liabilities this week.
The downgrade of the COPs two notches to Caa3 reflects the lack of a dedicated revenue stream that is currently being levied and the uncertainty of enforcement of a judgment lien going forward.
The review for downgrade for all securities will focus on the EM's restructuring plan with respect to both bondholder repayment and potential treatment of the water and sewer system assets. Prior to today's action, the outlook for all of the ratings was negative based, in part, on the possibility that the city could file for bankruptcy.