Fitch Downgrades Detroit's Sewer Bond Rating (UPDATED)

Earlier today, Fitch Ratings downgraded (slightly) the City of Detroit Water and Sewerage Department's sewer bond rating. Fitch assigned an A- rating to approximately $498 million in senior lien bonds (series 2012) that DWSD expects to market within the next 2 weeks. An A- rating by Fitch means the bonds are considered "Upper Medium Grade" bonds.  Fitch reports that the ratings outlook for DWSD debt is stable.

Fitch also downgraded $1.4 billion in senior lien sewer revenue bonds to A- from A; and $1.0 billion in second lien sewer revenue bonds to BBB+ from A-. 

For more information about Fitch's ratings decision, including the key rating drivers, review the entire Fitch press release. 

Moody's downgraded DWSD's water and sewer bond debt on April 9, 2012 (click here). 

Additional Resources:

• “Moody’s: Detroit Ratings On Review For Cut On Possible State Takeover,” Wall Street Journal, December 7, 2011 (subscription required)
• “Detroit on Review by Moody’s Will Pay $211 Million to Cut Swaps,”  Bloomberg Business Week, December 8, 2011 
• “Moody’s Puts Detroit GO, Water Debt on Negative Watch,” The Bond Buyer, December 8, 2011 
• "Fitch Drops $3B of Detroit Sewer Debt Ahead of New-Money Deal," The Bond Buyer, May 31, 2012

Update (5/31): The Bond Buyer reports (here) that $288 million of the $489 million in new bonds (debt) will be used to finance the termination of interest rate swaps, $185 million will be used for various capital projects with the balance to be used for a debt-service reserve fund.  

"It's the second time in several months that Detroit has borrowed to terminate interest rate swaps. In December [2011], the city sold $500 million of senior-lien water bonds, using about half of the proceeds to finance the unwinding of 15 interest rate swaps tied to water debt."  

In fact, the City paid $211.6 million in December, 2011 to unwind swap deals. Thus, in the span of 6 months, it appears that DWSD will have taken on just shy of $500 million in new debt to terminate credit default swaps! This is an extraordinary amount of money. 

There must be a very interesting back story to the Department's decision to enter into the swap agreements, which are now being terminated at tremendous cost. We need someone like Michael Lewis to help us explain what just happened here. I invite someone with the requisite financial background to contact me about this story.

Update (6/4): The Board of Water Commissioners has released a slug of documents (49pp.) related to the sewer bond sale, and swap termination issue, which can be accessed here in one large PDF.  I haven't had time to fully digest this information. 

Update (6/12): There are reports in the financial media (here) that DWSD's planned $500 million bond sale on June 14, 2012 has been postponed. No official word yet from DWSD. Undoubtedly, reports that the City of Detroit is about to run out of money by week's end are playing a major factor. 

Update (6/14): Earlier today, Moody's cut the rating on DWSD’s water and sewage senior lien and second lien debt by one notch to Baa2 and Baa3, respectively.  

For more about DWSD Update, click here.