CHICAGO - Standard & Poor's Feb. 26 affirmed its ratings and removed from CreditWatch Detroit's distributable state aid bonds issued in 2010 and 2012 through the Michigan Finance Authority, after the city released a bankruptcy plan of adjustment that protects bondholder claims.

The closed first lien is rated AA, the second lien carries a AA-minus rating, and the third lien carries an A-plus rating. The outlook is stable. The bonds were placed on CreditWatch in July when the city filed its historic Chapter 9 bankruptcy.

"The affirmation and CreditWatch removal reflect Standard & Poor's understanding that the terms of the bonds are not subject to negotiation with bondholders, as per the city's plan of adjustment filed with the bankruptcy court Feb. 21," said Standard & Poor's analyst Jane Ridley.

The plan of adjustment indicates that the DSA-backed bonds will have their claims reinstated and not be altered. Without a renegotiation of bond terms in bankruptcy, S&P analysts believe the payments should continue in full, and understand that the Nov. 1 payment was made on time and in full. The trustee is expected to continue to make debt service payments on the DSA bonds unless a bankruptcy court instructs otherwise.

The bonds' strengths include their statutory lien of DSA, consisting of state sales tax revenues Detroit receives from the state, the state treasurer's requirement to send all state aid due to the city directly to the trustee before releasing any state aid to the city, and a strict additional bonds test.

Offsetting factors include the sensitivity of the pledged revenue stream to both city and state economic conditions, the ability to issue additional bonds, and a weaker third-lien additional bonds test on the third lien.

"The stable outlook reflects our expectation that MADS coverage will remain strong and that distributions to the city will be stable," Standard & Poor's said. "If the city changes course and renegotiates bond terms with the bondholders, we could lower the ratings."

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