CHICAGO Standard & Poor’s hit the Detroit suburb of Lincoln Park, Mich. with a seven-notch downgrade, citing the city’s unwillingness to honor lease payments to a private company.
The move lowers the long-term rating on the city’s outstanding 2010 limited-tax general obligation bonds to BB from A-plus. The outlook is stable. The ratings agency does not maintain an unlimited-tax GO rating on the city.
The city issued $3.45 million of limited-tax general obligation bonds in 2010. The debt is insured by Assured Guaranty. There have been no recent trades.
Lincoln Park is located just south of Detroit in Wayne County. Like many cities in southeast Michigan, it has suffered severe property tax declines. The Michigan treasurer is in the midst of reviewing the city’s finances for possible consent agreement or financial emergency.
Standard & Poor’s said the seven-notch superdowngrade is due partly to the rating agency’s own revised GO criteria as well as to the city’s unwillingness to make payments on a lease agreement it has with a private company.
Lincoln Park several years ago contracted with SunTrust Equipment Finance for heating and air-conditioning supplies for city buildings. The lease agreement had roughly $3 million remaining as of the summer of 2013 with a final maturity of 2022 -- but the city did not make its last two quarterly payments. It also did not appropriate new payments into its 2014 budget.
SunTrust sued on Oct. 1, 2013, and the city has since worked out a settlement with the company that cuts the obligation down to $2.1 million. It plans to make annual payments from its general funds as well as a series of new special assessment taxes it levied.
City officials met earlier this month with Michigan officials, who were “delighted” by news of the settlement, according to local media reports.
Local officials did not immediately return calls.
But Standard & Poor’s said the city’s long-term willingness to continue to make payments on the lease obligation remains “uncertain” despite the settlement. The city also did not factor the $300,000 payment due next year into the 2014 budget, analysts said.
“Without significant budget adjustment, the settlement payment could worsen the city’s already negative general fund balance further by about $393,000 or negative 1.9% of expenditure at the end of fiscal 2014,” the report said.
The lower rating reflects a host of additional problems as well, analysts said. They include a very weak economy, very weak management conditions, and a weak budgetary performance that showed a general fund deficit of nearly 10% for audited 2012.
On the bright side, Lincoln Park has strong liquidity and a strong debt profile, analysts said.
“The stable outlook reflects our view that Lincoln Park's reserves will likely remain negative despite approved budget cuts to prevent further deterioration,” the report said. “We do not expect to raise the rating in the next two years given the city's very limited budgetary flexibility and our long-term view of its diminished willingness to meet its obligations in the event of further budgetary pressures.”