NEW YORK--(BUSINESS WIRE)--Fitch Ratings removes the Negative Rating Outlooks from the following Detroit, Michigan bond ratings and places them on Rating Watch Negative:--$541 million unlimited tax general obligation (ULTGO) bonds 'BBB';
--$154 million limited tax general obligation (LTGO) bonds 'BBB';
--$34 million Detroit Economic Development Corp. resource recovery revenue refunding bonds series 2001A 'BBB+';
--$1.5 billion Detroit Retirement Systems Funding Trust certificates of participation (COPs) series 2005-A, 2005-B, 2006-A and 2006-B 'BBB'.
The placement of the ratings on Rating Watch Negative is due to the possibility that Detroit (the city) will have to make significant termination payments related to interest rate swap agreements totaling $800 million in notional value on the Detroit Retirement Systems Funding Trust COPs. The size of the termination payments is reportedly about $400 million but is subject to change based on movements in interest rates. The city is currently in discussions with its swap counterparties. A payment of the magnitude of the current valuation, if required, would notably increase the city's already considerable financial pressures.
Over the next few weeks, Fitch expects to review the ratings based on any developments on the swap terminations, as well as an evaluation of the city's updated credit fundamentals. Fitch is concerned with the city's weak current economic indicators, prospects for further declines in employment and wages, considerable challenges in achieving balanced financial operations as a first step towards eliminating a large accumulated general fund balance deficit, and continued delays in reporting audited financial results.
Nine consecutive operating deficits led to an unreserved fund balance deficit at the end of fiscal 2006 of 11.2% of spending. The fiscal 2007 comprehensive annual financial report has not yet been released, after several delays, making evaluation of the status of the deficit difficult. The city's unemployment rate for November 2008 was 17%, incorporating a 3.9% decline in the number of workers employed. Debt levels are above average on a per capita basis but exceptionally high as a percent of market value.
Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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