UPDATE 3-Michigan's economic rebound brightens credit prospects

Tue Apr 2, 2013 5:48pm EDT

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April 2 (Reuters) - Michigan's economic upswing won the state a higher credit rating from Fitch Ratings and a positive outlook from Standard & Poor's Ratings Services on Tuesday at the same time as the state's biggest city, Detroit, is trying to avoid bankruptcy.

"The upgrade is based on the state's rebounding economic performance, including the improved competitive posture of the state's auto industry after its restructuring," Fitch said in raising the state's general obligation rating to AA from AA-minus.

S&P, which revised the outlook on Michigan's AA-minus rating to positive from stable, said the state could be upgraded within two years if trends continue.

"An improvement in the rating could occur if the state continues its structural alignment of ongoing revenues and expenditures, excluding one-time budget items, while at the same time recent economic, demographic, and budgetary trends continue to be positive," S&P said in a statement.

Last week, Moody's Investors Service revised its outlook on Michigan's Aa2 rating to positive from stable.

While the state's economic outlook has brightened, Detroit is mired in deficits and running out of operating cash. A state-appointed emergency manager, who could recommend Detroit file for bankruptcy, has been running the city since last week. In its ratings report, Fitch did not mention Detroit or other Michigan cities and school districts that have emergency managers due to their fiscal problems.

Douglas Offerman, a Fitch analyst, said that while the rating agency discussed the emergency manager situation as part of its assessment of Michigan, the state does not have a financial obligation to the distressed governments.

Fitch also lauded the state's "considerable progress" in improving its finances through structurally balanced budgeting, bigger reserves and an improved cash balance.

Michigan was hit by the last recession before other states as its dependence on a then-struggling automotive industry eroded its revenue, depressed personal income growth and boosted unemployment.

But the state has bounced back along with the auto industry, which is in its fourth year of recovery from economic woes that pushed General Motors and Chrysler into bankruptcy in 2009.

According to the U.S. Bureau of Economic Analysis, Michigan's $337 billion economy has outperformed the broader U.S. economy in the recovery from the recession. The state's gross state product expanded by 4.9 percent in 2010 and 2.3 percent in 2011, the most recent year for which data is available. That compares with U.S. real GDP growth for those same two years of 1.8 percent and 2.2 percent, respectively.

Michigan's unemployment rate was down to 8.8 percent in February 2013 from a recession high of 14.2 percent in August 2009.

In the fourth quarter of 2012, U.S. domestic new-car output reached an annual rate of $119 billion in constant terms, up nearly three fold from $41 billion in the first quarter of 2009 and the highest rate since 1995.

U.S. car sales continued to run at a healthy clip in March, the fifth straight month that industry sales reached an annual rate of 15 million vehicles or more, data reported on Tuesday showed. The three Detroit-based manufacturers showed healthy yearly sales increases: General Motors Co and Ford Motor Co were up respectively 6.4 percent and 5.7 and Chrysler Group LLC, a unit of Italian automaker Fiat SpA, was up 5 percent.

Michigan Governor Rick Snyder said the recent action by credit rating agencies "sends a clear message that Michigan is on the right track and moving forward."

About $2 billion of outstanding Michigan general obligation bonds are affected by the upgrade. Fitch revised the rating outlook to stable from positive.

The credit rating agency also upgraded the rating on various revenue bonds issued by the Michigan State Building Authority and school district bonds sold through the Municipal Bond Authority to AA-minus from A-plus.

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