Moody’s upgrades Detroit’s rating, outlook

Christine Ferretti
The Detroit News
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Detroit — A second rating agency has upgraded the city’s credit status and its outlook as it recovers from the largest municipal bankruptcy in the nation’s history.

Moody’s Investors Service said Thursday that it has upgraded Detroit’s issuer rating to B2 from B3. The agency has also raised the city’s outlook from stable to positive. The rating, Moody’s notes, reflects the General Obligation Unlimited Tax pledge of the city. It does not apply to an income tax revenue bond issuance that’s expected next month.

The improved rating isn’t tied to any specific debt issue by the city, but measures Detroit’s overall creditworthiness for investors in municipal debt. The B2 rating from Moody’s is in line with the B rating the city received from Standard & Poor’s on Wednesday, leaving the city’s rating solidly in the junk debt category, a full four rankings below the lowest investment-grade rating.

The issuer rating upgrade, Moody’s said, reflects the city’s improved financial position following its December exit from bankruptcy

“The rating also incorporates management’s continued improvement of city financial operations and signs of economic development in the city,” the report says. “Offsetting these factors are persistent tax base weakness, with continued population loss and taxable valuation declines that are expected to continue over the near term.”

The outlook improvement, it notes, is based on ongoing implementation of new budgeting, operating and economic improvements.

Moody’s findings come one day after Standard & Poor’s Rating Service announced Detroit had received an investment-grade bond rating on $245 million in bonds tied to the city’s bankruptcy exit financing.

Standard & Poor’s 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. Even though the city’s overall credit rating is much worse, those bonds received an investment-grade rating because of those and other specific provisions in the revenue bonds to guarantee investors will be repaid.

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., as the city made its exit from Chapter 9.

The city’s underlying credit status however is still rated in junk bond territory.

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.

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