Duggan touts rating of new city bond issue

Christine Ferretti and Brian J. O'Connor
The Detroit News

Detroit Just months after the city’s historic bankruptcy, new bonds essential to improving Detroit city services have earned an upgrade from a major credit agency, Mayor Mike Duggan announced Wednesday.

The city received an investment-grade bond rating from Standards & Poor’s Rating Service on $245 million in bonds tied to the city’s bankruptcy exit financing.

“If you had said six months ago there was any chance the city of Detroit could be borrowing with an investment-grade credit rating, people would have thought that was very unlikely,” Duggan said during an afternoon news conference. “But it gives you an indication of how far we’ve come in a short period of time.”

The rating service assigned an ‘A’ rating, with a stable outlook, to Michigan Finance Authority’s Local Government Loan Program revenue bonds, issued on behalf of Detroit and based on a first-lien pledge of the city’s income tax. The bonds are also secured by a limited-tax general obligation pledge.

The city says the favorable rating should allow it to save $2.5 million annually and $20 million in interest costs over the life of the debt. The financial recovery bonds were originally privately placed with Barclays Capital Inc., on Dec. 10 as the city made its exit from Chapter 9.

However, the city’s underlying credit status is still rated in junk bond territory.

Standard & Poor’s assigned a “B” rating for the city’s overall credit — five grades below the lowest invest-grade rating.

The higher rating on the bonds is because Detroit’s tax revenue has been rising for the past four years, and because money from the city’s income tax will bypass city coffers altogether. Instead, the money will go directly from taxpayers to the bank accounts of a trustee who can use the money only to pay bondholders. In fact, the terms of the bonds call for daily deposits as tax revenue is collected.

“The ‘A’ rating isn’t based on the credit of the city itself,” said Jane Ridley, a credit analyst with Standard and Poors. “It’s based on the strength of the revenue pledge and the income stream. It doesn’t really stay in the city’s hands at all. It’s designed to be immediately taken by the trustee for the benefit of bondholders.”

The city’s overall creditworthiness won’t improve until it posts several years of growth and stability in tax revenue, increasing investment in the city, and a stable city government that can improve city services, said Lisa Washburn, managing director of Municipal Market Analytics, a Concord, Massachusetts, firm that analyzes the municipal bond market.

“That’s not something that happens in the short run — it’s a multi-year process,” Washburn said Wednesday. “If those markers happen over the next several years, then the city will be positioned for positive improvement. But I think we’re a pretty long way off from that right now.”

The investment-grade bonds are being used to finance several priority projects, including the overhaul of its financial management system and the Detroit Fire and Police department fleets.