Standard & Poor's Ratings Services has lowered its rating on Detroit's unlimited- and limited-tax general obligation (GO) bonds and pension obligation certificates to 'CCC-' from 'B'. The outlook is negative.
"The downgrade is based on recent announcements from the city's Emergency Financial Manager that Detroit may take steps to adjust payments to bondholders, as well as immediate plans to meet with bondholders to discuss the city's financial condition and resources," said Standard & Poor's credit analyst Jane Hudson Ridley.
In March 2013 when the Emergency Manager was appointed, Standard & Poor's revised its outlook on the bonds to stable from negative. This was based on our view of the appointment as a positive step toward Detroit regaining structural balance and improving its overall financial condition. However, the Emergency Manager's announced plans to pursue adjustments to debt payments--and last week's announcement of a meeting with creditors, including bondholders--significantly reduce what we viewed as positive factors for bondholders provided by the powers of an Emergency Manager. Standard & Poor's views this as an evolving situation, and we expect conversations with bondholders and creditors concerning payments to be ongoing.
Detroit is currently evaluating options to adjust its funded debt obligations to better fit its projected cash flow profile. These options may include rescheduling principal amortization without reduction in principal; permanently reducing the principal amount of debt outstanding; reducing interest rates, as appropriate, to achieve targeted cost savings or compensate for lost/extended principal; and issuing new debt to provide certain cash recoveries to creditors. While the city has not stated its intent to file for Chapter 9 bankruptcy, it appears to remain one of the Emergency Manager's potential outcomes, and the filing is under his control, with the governor's approval.
A 'CCC-' rating reflects Standard & Poor's view of entities that have announced an intention to undertake a debt restructuring. Should Detroit move to restructure its debt with principal reductions or other changes that negatively affect the full or timely payment to bondholders--or wherein the investor will receive less than the promise of the original securities--we would view this as a selective default. The negative outlook on the bonds reflects this potential.