The risk of default is more elevated for junk-rated Detroit Local Development Finance Authority's subordinate lien tax increment financing bonds issued in 1997 to finance costs tied to the construction of an auto plant, S&P Global ratings said.
S&P on Wednesday affirmed its B-minus rating on the $15 million subordinate bonds outstanding and revised its outlook to negative based on continued declines in revenues that haven’t been enough to cover payments since fiscal 2011. For the year ended June 30, 2018, the LDFA collected roughly $4 million in taxes and had debt service of $6.8 million, according to audited financial statements posted on EMMA.
The LDFA sold the bonds to help cover costs the city incurred for the construction of what was then the Chrysler Corp.'s Jefferson North Assembly Plant, which opened 1992. The company, now Fiat Chrysler Automobiles, produces Jeep Grand Cherokee and Dodge Durango sport utility vehicles there today.
LDFA has been drawing on its cash reserve to meet bond payments but the rating agency warned that those reserves are rapidly declining. The property taxes of the LDFA are pledged for repayment of the bonds.
The rating agency also affirmed the B ratings on $6.5 million of senior lien bonds outstanding issued in 1997. The outlook is stable on the senior bonds. All debt matures in 2021.
"The negative outlook on the B-minus subordinate-lien ratings reflects our view of the declining taxable values and pledged revenues, as well as the declining cash reserves that are relied on to cover the revenue shortfalls," said S&P credit analyst John Sauter.
Sauter warned that a downgrade of the junk rating could follow if collections were to experience a large decline over the next two years and cash is projected to be depleted below levels that can cover debt service shortfalls.
"If fiscal 2019 collections are below projected levels and if the fiscal 2020 levy declines at a larger rate than in prior years, resulting in projected cash that we view as insufficient to cover revenue shortfalls on the subordinate bonds, we could lower the rating, based on an increased risk of non-payment,” said Sauter. “If pledged revenues stabilize or grow in the next one-to two years or if there is an additional infusion of cash with the LDFA, we could revise the outlook to stable, as this would reduce the likelihood of cash reserves being insufficient to cover shortfalls through maturity.
Sauter said that the pledged revenues will remain sufficient to adequately cover senior-lien debt service.
“The pledged revenues can withstand a decline in taxable values and still be sufficient to cover senior-lien obligations, before factoring in cash on hand and the debt service reserve fund that could be relied on,” he said.
The city during the late 1980s and early 1990s paid for streets, lighting, and other infrastructure around the factory site near the Detroit River. The project area totals 380 acres and the plant occupies roughly 60% of the land.
The debt service for the bonds issued to support the project is the only long-term liability the LDFA has.
