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NEW YORK, Feb 28(Reuters) - Analysts at Fitch Ratings on Friday cut some $4 billion worth of bonds issued on behalf of the Water and Sewerage Department of Detroit to junk, citing the weak finances and outlook for the system run by the bankrupt city.
The Wall Street agency dropped $1.1 billion of senior lien water bonds and $1.6 billion of senior lien sewer bonds one notch to BB+ from BBB. About $1.35 billion of second lien water and sewer bonds were cut one notch further to BB.
"Fitch believes financial improvement over the near term is unlikely given recent disclosure regarding the full scope of customer delinquencies," analysts said in a statement. "Fitch's concerns about delinquencies are further exacerbated by the city's status as a bankrupt entity."
Saddled with some $18 billion in debt, Detroit declared bankruptcy last July, the biggest municipal bankruptcy filing in U.S. history. A court-appointed emergency manger released a blueprint last week detailing how the city will restructure its debt and ultimately emerge from bankruptcy.
Unlike many general obligation bonds, debt secured by the city's water and sewer revenues are considered secured, meaning holders are expected to recover 100 percent of their principal.
Fitch said uncertainty remains about attempts by the emergency manger to impair creditors through changes to certain terms, including the removal of call protections that would allow Detroit to refinance the debt.
"Fitch believes that there is no legal basis to compel bondholders to accept such impairment as proposed in the plan of adjustment," the ratings agency said.
The rating agency said the water and sewer authority's ability to increase rates while improving collections from residents will be important in maintaining the rating.
If the authority cannot break even on its operations, it would be vulnerable to further downgrades, Fitch added.
The bonds remain on ratings watch negative, and Fitch noted that the authority's debt load would likely remain high for the foreseeable future.