Moody's says Detroit bankruptcy could mean further downgrades

April 24 Wed Apr 24, 2013 2:29pm EDT

April 24 (Reuters) - Detroit's already low credit ratings could sink further if the city is allowed to file for bankruptcy, Moody's Investors Service said on Wednesday.

The credit rating agency said a decision by the city's state-appointed emergency manager and Michigan's governor to authorize a Chapter 9 municipal bankruptcy filing would lead to a restructuring of Detroit's debt that could reduce or delay payments on its outstanding bonds.

Moody's, which rates Detroit's general obligation debt deep in the junk category at Caa1 with a negative outlook, also said Detroit could be pushed into bankruptcy if interest rate swap agreements are terminated. While the termination of those agreements has already been triggered, negotiations are ongoing with the swap providers. A termination could cost the city as much as $440 million, or about 22 percent of its annual operating budget.

Legal challenges to a 2012 Michigan law governing fiscally stressed local governments and the emergency managers that run them could derail attempts to improve Detroit's sagging finances, Moody's said. That law also provides a path to federal bankruptcy court if the move is recommended by the emergency manager and authorized by the governor.

"Any delays or reductions to the financial restructuring plan could further weaken overall credit quality and may also accelerate a potential bankruptcy filing or default on debt obligations by the city," Moody's said in a report.

Kevyn Orr, a bankruptcy attorney who took over Detroit as its emergency manager on March 25, is required to present a financial and operating plan to the Michigan Treasurer next month.

"Any potential rating action will weigh the details of the plan and its effectiveness upon implementation," Moody's said.

Both Orr and Governor Rick Snyder have said talks with creditors, including bondholders, were needed to help solve Detroit's fiscal mess, which mushroomed as the city's population dropped along with its revenue. The city council last week approved a contract with Orr's former law firm, Jones Day, as restructuring counsel.

Detroit has about $2.4 billion of outstanding GO debt, $6 billion of water and sewer revenue bonds, and unfunded liabilities of $6 billion for retiree healthcare and $650 million for pensions, according to a March report from the mayor's office.

Moody's said the city has sufficient cash to make a $31.6 million debt service payment on its general obligation debt due May 1 and a $39.7 million payment on its pension debt on June 15. But the city must craft a new budget for fiscal 2014, which begins July 1, and it faces subsequent debt payments in October, November and December totaling $43.2 million, according to the rating agency.

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