June 12 As Detroit prepares to discuss with
creditors how to avoid bankruptcy, Standard and Poor's Ratings
Services on Wednesday lowered the city's rating by four notches
to CCC minus.
The downgrade from B, which affects both general obligation
bonds and pension obligation certificates, is based on recent
announcements from the city's emergency financial manager "that
Detroit may take steps to adjust payments to bondholders," said
Standard & Poor's credit analyst Jane Hudson Ridley in a
The outlook is negative, reflecting expectations that within
a year further downgrade are possible. A rating of C is reserved
for entities that have actually filed for bankruptcy, while D
ratings are for actual defaults.
"Should Detroit move to restructure its debt with principal
reductions or other changes that negatively affect the full or
timely payment to bondholders" or in any other deal under which
investors will get less than originally promised "we would view
this as a selective default," the rating agency said.
Kevyn Orr, a bankruptcy lawyer who was appointed as
Detroit's emergency financial manager in March, is scheduled to
meet with the city's creditors on Friday. According to media
reports Orr may propose heavy "haircuts" to bondholders.
The story of Detroit's decline is decades old: Its tax
revenue and population have shrunk and labor costs have remained
out of whack. Motown could become the U.S. largest municipal
bankruptcy surpassing by far the $4.2 billion of Jefferson
County in Alabama.
S&P listed several options that Detroit is currently
considering to adjust the funded debt obligation to its cash
profile, ranging from a reschedule of the amortization to cuts
into the debt principal.
"We expect conversations with bondholders and creditors
concerning payments to be ongoing," the rating agency said.
Earlier this week, Orr said at a public meeting that the
city has a 50/50 chance of filing for bankruptcy.
Friday's meeting is expected ahead of a June 15 payment of
roughly $34 million that the city said it intends to make. "We
are current on all the city's debt obligations and intend to
remain so," said Bill Nowling, Orr spokesman, in e-mailed
"But, as we have consistently said, the emergency manager
and his team are examining all options available that will allow
the city to meet the needs of its 707,000 residents while
satisfying its obligations to creditors" he added.
In May, Moody's, which rates Detroit's general obligations
Caa1 with a negative outlook, said that the city's bondholders
face a growing chance of default or bankruptcy.