CHICAGO — Detroit snagged investment-grade ratings from Moody's Investors Service on its senior-lien water and sewer debt for the first time since before the city filed for bankruptcy.
Moody's Thursday upgraded the senior-lien water and sewer bonds two notches to Baa3, the lowest investment-grade rating, from Ba2. The junior-lien water and sewer debt was upgraded two ratings to Ba1, the highest junk-grade rating, from Ba3.
The outlook on all the debt was also revised to positive from stable, signaling the possibility of another upgrade. In all, the city has about $5.2 billion of water and sewer enterprise debt.
Detroit's water and sewer revenue bonds were for years among the city's highest-rated debt, as analysts said they considered the massive water and sewer system — which serves more than a third of Michigan — relatively isolated from the rest of the city's problems. But the ratings agencies began knocking the debt down in 2013 after then-Emergency Manager Kevyn Orr declared he would restructure the bonds amid the financial crisis that sent the city into bankruptcy.
Moody's downgraded the debt to junk in June 2013, a month ahead of the city's bankruptcy filing; Standard & Poor's dropped it to junk ahead of the filing and Fitch Ratings downgraded it to junk in February 2014.
Both Fitch Ratings and Standard & Poor's lifted the senior-lien water and sewer bonds out of junk territory last year as the city launched a tender program that refunded a swath of the debt. The refunding was part of the city's final financing to help it exit bankruptcy. Moody's kept all the senior- and junior-lien debt in speculative territory until the Aug. 27 rating action.
The latest action follows Moody's upgrade of the city's general obligation bond rating on July 30, lifting it to B2 from B3, keeping it in junk territory. Standard & Poor's, citing specific legal backstops for the debt, assigned an investment-grade A rating to $245 million of income tax-backed bonds that featured a statutory lien and trust and marked the city's first post-bankruptcy public borrowing. S&P continues to rate the city's GO bonds deep in speculative-grade territory.
Moody's said the water and sewer upgrades come amid improving operations at both systems.
"The management team has implemented strategies to increase efficiency, improve billing collections, provide better services, track financial performance, and update capital planning," analysts said in a press release. "The [enterprises' financial profile remains stable with adequate coverage, strong liquidity, and high debt, while still pressured by looming capital needs."
The positive outlook is part is due to the expectation that the city and three counties will execute a deal to form a new regional bond-issuing authority called the Great Lakes Water Authority to take over the Detroit Water and Sewerage Department. The deal, which was part of the city's bankruptcy exit restructuring plan, is due to be completed by Jan. 1.
"Once all of Detroit's water and sewer revenue debt become obligations of GLWA, the rating could be several notches higher, reflecting the legal separation of the authority from the city," Moody's said. "The separation will significantly limit the possibility that the water and sewer revenue debt would be at risk of impairment if the city were to again file for bankruptcy."
In the upgrade report, Moody's noted that the system benefits from a large service area, ample supply and a new management team that's focused on improvements. Challenges include a high level of debt, uncertain future capital needs and competition from new regional systems.
