April 9, 2012 / 9:16 PM / 6 years ago

UPDATE 1-Moody's cuts Detroit water and sewer debt ratings

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April 9 (Reuters) - Moody’s Investors Service on Monday downgraded the ratings on Detroit’s water and sewer debt, citing a heightened risk of default and bankruptcy by the city.

“Should the city file for bankruptcy, the assets of the water and sewage disposal systems would not likely be subject to an automatic stay, however, the water and sewage disposal systems’ assets and finances may not be immune from additional pressure given the city’s deteriorating fiscal condition.” the credit rating agency said in a statement.

In addition, the water and sewer systems could be liable for some portion of an estimated $350 million Detroit may have to pay after a termination of the city’s interest rate swap agreements was triggered when Moody’s last month cut the city’s general obligation bond rating further into the junk category to B2.

A Detroit official has said the city will continue to hold discussions with swap counterparties to avert any negative financial impact.

Moody’s cut the rating on Detroit’s senior lien water and sewerage disposal debt to Baa1 from A1 and the rating on second lien debt to Baa2 from A2.

The water and sewer debt ratings remain under review for a further downgrade pending a review of a recently approved consent agreement aimed at putting Detroit on a stronger financial footing, as well as other matters, according to Moody‘s.

A Michigan review team charged with recommending a plan to improve Detroit’s sagging finances and the Detroit City Council approved a consent agreement last week that averted a state takeover of the city. The deal provides some state oversight, tighter financial controls and calls for more uniform collective bargaining agreements. (Reporting By Karen Pierog; Editing by Chizu Nomiyama and Leslie Adler)

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