CHICAGO - Standard & Poor’s junked nearly $6 billion of Detroit’s water and sewer bonds Wednesday amid the possibility that the city’s emergency manager Kevyn Orr will restructure the debt.
The ratings agency dropped the debt as much as nine notches, from the highest A-plus rating on the senior-lien bonds to BB-minus for all the debt. It is keeping the bonds on ‘developing watch’ because of the uncertainty of a restructuring.
“We expect to resolve the credit watch status when we receive clarification about whether a debt restructuring or negotiated exchange will take place, which we view as tantamount to a default,” analyst Scott Garrigan said in the downgrade report on the water bonds.
Orr, in his restructuring plan released June 14, halted payments on all the city’s so-called unsecured debt, while maintaining payments on debt with a specific lien. Orr said the city will negotiate with holders of the secured debt, including water and sewer bonds, to try to restructure or reach a new agreement on debt payments. A restructuring would most likely include lower debt payments, at least in the near term.
“In seeking clarification from city officials on the likelihood of a debt restructuring, it is our view that a restructuring or negotiated agreement for payment of the city’s sewage debt cannot be ruled out,” Garrigan said in the sewer report. “We do note, however, that in our opinion it is not clear whether the emergency manager would be able to act in lieu of the Board of Water Commissioners with regard to a debt restructuring. Nevertheless, we believe that the existence of this possibility is not consistent with an investment-grade rating.”
The rating will likely be dropped further to CC if a restructuring or settlement is announced, S&P said.
The debt would likely be put on credit watch with negative implications if the city pursues a bankruptcy, Garrigan said.
Detroit has about $5.9 billion of water and sewer bonds. The revenue bonds have carried investment-grade ratings for years as analysts have considered the water and sewer systems relatively isolated from the rest of the city’s problems.
But Orr’s restructuring plan has invited a series of downgrades.
Moody’s Investors Service in mid-June lowered the water and sewer debt two Ba1 on the senior-lien debt and Ba2 on the second-lien debt, on review for another downgrade. Fitch Ratings downgraded the debt in early April, but kept them in investment-grade territory. Fitch rates the senior-lien debt BBB-plus and the second-lien debt BBB.
Orr is also considered privatizing the water and sewer department under a new authority. Garrigan said the move could be positive or negative, depending on the legal framework of the new authority, the relationship between the city and the authority, rate-setting ability, and coverage levels, among other factors.
S&P downgraded the city’s general obligation bonds four notches in early June.