DPS debt rating cut again as refinancing deadline nears

Shawn D. Lewis
The Detroit News

For the second time in two months, the rating on Detroit Public Schools’ state-backed debt has been lowered, reflecting concerns that the bonds may not be refinanced by the start of the state’s new fiscal year Oct. 1.

S&P Global Ratings said Tuesday it had cut its rating on bonds held by the former Detroit district from BB to B for those issued in 2011 and BB- to B for those issued in 2012.

“The downgrade is based on the lack of a finalized plan regarding bondholder repayment terms following the district’s recent restructuring, and the resultant elimination of a pledged revenue stream at the end of the state’s fiscal year,” S&P credit analyst Jane Ridley said in a news release. “Although the Michigan Finance Authority’s intent is to take out the existing debt at full value, in our view, as October looms closer and ushers in the new fiscal year, it creates greater uncertainty as to whether bondholders will receive full and timely payment on their bonds.”

State lawmakers approved a $617 million rescue plan in June that created a new Detroit school district and left the old system with hundreds of millions of dollars in debt. The restructuring diverts state aid payments to the new Detroit Public Schools Community District.

Danelle Gittus, a spokeswoman for the Michigan Department of Treasury, attributed the downgrade to the $617 million rescue package.

“The focus of the downgrade is on bonds that are being refinanced as part of the recent DPS legislation,” she said Tuesday. “This downgrade does not impact the ability to refinance the bonds. The Michigan Finance Authority continues to work on a financing plan to refund the bonds, which is expected to be completed later this month. Once the bonds are refunded, the rating becomes irrelevant.”

The Detroit Public Schools Community District did not immediately respond to a request for comment.

S&P had cut its ratings on the Detroit school debt by six levels between late June and mid-August, placing them in junk status.