October 10, 2014 / 5:26 PM / 5 years ago

New Detroit water authority may protect bondholders -Moody's

Oct 10 (Reuters) - A new regional water and sewer authority for Detroit and three southeast Michigan counties could ease risks for bondholders should the city return to bankruptcy court in the future, Moody’s Investors Service said on Friday.

The Great Lakes Water Authority, which grew out of federal court-ordered mediation in Detroit’s current bankruptcy case, could result in meaningful governance and legal separation from Detroit, the credit rating agency said in a report.

“This development will be positive for existing holders of Detroit water and sewer bonds if the final terms of the agreement sufficiently isolate the systems from direct Detroit bankruptcy risk,” Moody’s stated.

Some of the city’s $5.2 billion of water and sewer revenue bonds faced impairment under Detroit’s plan to adjust $18 billion of debt and exit the bankruptcy the city filed in July 2013, which ranks as the biggest-ever municipal bankruptcy. However, the bonds escaped impairment when Detroit successfully completed a tender offer and bond refinancing in August.

Detroit’s city council and the Wayne, Oakland and Macomb county commissions have approved the authority. Under the deal, Detroit will continue to own the water and sewer system and lease it to the authority for $50 million a year for 40 years. That money would allow for issuance of up to $800 million of bonds to fix ageing pipes and other related infrastructure in the city.

Moody’s said the new authority will “remain exposed to Detroit’s credit weakness as the city will likely become its largest wholesale customer.”

Detroit Mayor Mike Duggan said on Friday that once the authority is in place in early 2015, the city will begin rebuilding crumbling water mains.

A hearing in U.S. Bankruptcy Court to determine if Detroit’s debt adjustment plan is fair and feasible is scheduled to wrap up later this month. (Reporting by Karen Pierog; Editing by Leslie Adler)

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