DALLAS – Uncertainty over the future security of Detroit Public Schools state-aid backed bonds, governance and tax collection issues following the district's restructuring prompted Moody's Investors Service to shift its outlook to "developing" from "negative."

Moody's on Wednesday revised the outlook on DPS' Caa1 issuer rating, deep in junk territory, saying the rating could move in either direction once various issues tied to the district's restructuring are resolved. Uncertainty over the outcome of a restructuring of limited tax state aid revenue bonds is a key concern.

Property tax collection trends and the success of the eventual transfer of the district's governance from emergency management to a voter-approved Board of Education also will impact the district's rating, said Moody's.

"The outlook reflects the continued significant unknowns facing DPS, the outcomes for which could pose both positive or negative credit implications," analysts wrote.

The district was formally divided into two separate entities on July 1 in connection with a $600 million state package approved this year by state lawmakers as the district grappled with insolvency.

The new Detroit Public Schools Community District operates schools and will receive the future state aid payments that had secured $212 million of 2011 and 2012 bonds.

Those bonds also carry a limited tax general obligation backing.

The former district, referred to as Old Co, remains intact solely to continue to collect its tax millage and repay its tax-backed bonds and will become the obligor of the state aid bonds Oct. 1 when the aid shifts to the new district that operates schools.

Though Moody's assigns an issuer rating, it doesn't have an underlying rating on any of the bonds it has issued.

It assigns an enhanced Aa1 rating with stable outlook on the district's GO capital bonds based on the strength of Michigan's School Bond Qualification and Loan Program, supported by the Aa1-rated state government.

The bonds' underlying security is the authorization and pledge to levy a tax unlimited as to rate and amount to pay debt service, further supported by  the SBQLF state enhancement program, which  provides for the issuance of state loans to repay any portion of debt service not covered by the district's levy, which, in order to remain qualified under the state enhancement program, cannot exceed 13 mills.

The district's state aid revenue bonds are secured by per-pupil state aid payments. State aid can only flow to school districts with students, so the only remaining fundable pledge backing the old district's bonds when the state starts its next fiscal year in October will be its limited tax GO pledge.

On Tuesday, S&P Global Ratings, which had previously assigned A-level ratings to the district's state-aid backed bonds due to the direct payment of the state aid to debt service, downgraded the bonds to B over uncertainty tied to the bonds' security now that the per pupil payments to the old district have stopped.

The Michigan Finance Authority is currently working towards refunding the outstanding Series 2011 and Series 2012 bonds.

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