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UPDATE 1-Detroit water, sewer ratings upgraded ahead of bond sale
August 26, 2014 / 3:50 PM / 3 years ago

UPDATE 1-Detroit water, sewer ratings upgraded ahead of bond sale

(Adds S&P ratings, deals’ insurance, structure, spot premarketing yields)

Aug 26 (Reuters) - Detroit’s water and sewer revenue bond credit ratings were raised ahead of a $1.8 billion debt sale that is expected to hit the municipal market on Tuesday, but Moody’s Investors Service kept the debt in junk territory.

Standard & Poor’s Ratings Services on Tuesday rated the refinancing bonds investment-grade at BBB-plus and upgraded the rating on unimpaired existing water and sewer bonds to BBB-plus from CCC.

Moody’s late on Monday had upgraded the city’s senior lien bonds to still-junk levels at Ba2 from B1 and second lien bonds to Ba3 from B2. The credit ratings agency said it based the upgrades on the fact that the city’s recent tender offer, which returned nearly $1.5 billion of the $5.2 billion outstanding water and sewer debt for repurchase, removes the debt from Detroit’s ongoing bankruptcy proceedings.

“This transaction diminishes the risk of an economic loss to water debt bondholders in the near term, though the system’s rating is constrained by its ongoing linkage to Detroit as it remains a department of the city,” Moody’s said in a statement.

If the tender is completed through the issuance of the revenue refinancing bonds, debt that was not tendered will continue to be paid under current terms and rates.

In the absence of the tender, call protection would have been eliminated or interest rates would be reduced on “impaired” outstanding water and sewer bonds under the plan. Those bonds make up about $2.2 billion of the existing $5.2 billion of debt.

But some of the tendered bonds are being purchased by the city at below par levels, S&P said, and it downgraded those bonds to CC from CCC.

“All ratings that are CC are considered to involve a distressed exchange in which bondholders are receiving less than the original promise,” Scott Garrigan, an S&P credit analyst, said in a statement.

He added that after the bond sales’ closing date, expected to be Sept. 4, the rating will drop to D for default and then to not rated.

Fitch Ratings late on Monday said it expects to rate the senior lien bonds BBB-minus, the lowest investment-grade level, and the second lien bonds BB-plus. Fitch had previously rated the senior lien bonds and second lien bonds BB-plus and BB, respectively.

The refinanced bonds, issued through the Michigan Finance Authority and priced by lead underwriter Citigroup, will raise money to pay for the tendered bonds, and fund about $162 million in new projects.

Most of the bonds will be insured by Assured Guaranty Municipal Corp or National Public Finance Guarantee Corp, lifting ratings to investment grade, according to the deals’ preliminary structure.

Sewage disposal system bonds are structured with term bonds due in 2044 with premarketing yields as high as 5.22 percent and serial bonds that go out as far as 2036 yielding 4.93 percent. Water supply system bonds have serial maturities that extend to 2037 with a premarketing yield of 4.62 percent. (Reporting by Karen Pierog; , editing by G Crosse, Dan Grebler)

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