CHICAGO – The struggling Pontiac, Michigan school district got a bit of good news Friday when Moody’s Investors Rating boosted its outlook to stable from negative while affirming its deep junk rating.

Moody’s rates the district Caa1, seven notches under investment grade. The rating reflects the district’s May 2013 default on a debt payment that made it one of the only Moody’s-rated school districts in the nation to default.

The ratings agency affirmed the low rating on Feb. 26, saying it reflects the possibility of another default. But it noted a stabilization in the district’s fiscal position as the reason for an improved outlook.

“The stable outlook reflects that while the district’s financial operations remain distressed and liquidity is extremely narrow, the district’s financial position is no longer deteriorating,” Moody’s said in its report. “The district is better positioned to respond to a future liquidity crisis given improved financial management and improved coordination and oversight from the state of Michigan.”
Located 25 miles outside Detroit, the district serves 5,500 students and faced a nearly $52 million deficit as of April 2014. It is already under state control, a process that followed its default. The city of Pontiac emerged last year from state oversight after eight years.

Moody’s said the district faces a liquidity crisis as soon as July.

But bondholders would likely see a relatively high recovery even if it defaults on another bond payment, analysts said. The Caa category reflects expected recoveries of 65% to 95%.

“The Caa1 issuer rating reflects the risk that the district could again default on a debt-service payment given its continued narrow cash flows, but that recovery rates would likely be high,” Moody’s said.

An upgrade may come if the district is able to improve its liquidity, reduce its reliance on cash-flow borrowing, or stabilize enrollment trends, analysts said.

A downgrade may come if the state appoints an emergency manager, as that increases the possibility of a bankruptcy filing, according to Moody’s; or another missed payment or failure to reach goals in current recovery plan.

The district has $22.6 million of limited-tax general obligation bonds.

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