Board of Water Commissioners, Bankruptcy Court Approve Bond Exchange

On August 22, 2014, the Board of Water Commissioners approved a deal under which 28% of existing water and sewer bond holders agreed to tender back their bonds. The Water Board's decision came just a day after the deadline for bond holders to accept DWSD's tender offer, which expired August 21st at 5:00 p.m. (EDT).  

Earlier today [8/25], the Bankruptcy Court overseeing the City of Detroit's bankruptcy proceedings approved DWSD's decision to buy back and redeem $1.67 billion worth of water and sewer bonds.

According to DWSD's Chief Financial Officer, Nicolette Bateson, refinancing these bonds will save $11.4 million a year fro the first 19 years. Refinancing will also allow DWSD to raise $150 million for capital improvements to the sewerage system. 

The Detroit News explained on Friday [8/22] that acceptance of the tender offer would also remove bondholders from the bankruptcy process, "taking the wind out of ongoing litigation over the water and sewer bonds" and increase the likelihood that the City's plan of adjustment will be approved by Judge Rhodes. 

For more about DWSD Update, click here.

DWSD Water and Sewer Bond Rating Nears Bottom (UPDATE)

Detroit's water and sewer bond rating isn't at the bottom of Fitch's credit rating scale, but its getting very close. 

As reported earlier this week by Bond Buyer and today by the Detroit Free Press, the Fitch Ratings is warning that DWSD's $5.7 billion water and sewer debt could fall to "D" rating if the bankruptcy court approves the Emergency Manager's current plan of adjustment. 

Under the Fitch bond rating scale, there is nothing below a "D" rating. That's as low as it is. 

Comment: In my view, the negotiations concerning a regional water authority should be coming to a head very soon. With Governor Snyder poised to participate in the process, if his staff isn't already involved in the secret settlement talks, and the pressure from Wall Street beginning to build, I anticipate a tentative deal to be announced very soon. I think there is still much work to be done before any deal regarding the new authority can be finalized, but I think the outline of a deal is taking shape. 

Update (6/16): Earlier today, Fitch Ratings withdrew its "D" bond rating of Detroit's water and sewer debt. If I'm reading Fitch's ratings definitions correctly, Fitch is no longer providing a rating for DWSD's bonds. I think this is the equivalent of a stock being delisted by one of the stock exchanges. In other words, not good.     

For more about DWSD Update, click here. 

Karegnondi Water Authority to Sell $220 Million in Water Bonds for New Pipeline (UPDATED)

The Bond Buyer reported earlier this week [3/26] that the Karegnondi Water Authority (KWA) is making plans for an initial $220 million bond offering to finance its new 63 mile pipeline, which was first proposed in 2009. Bonds could be sold as early as next week [4/1].  

As the Detroit Water and Sewerage Department's bond rating falls deeper into junk territory, the Karegnondi Water Authority has been assigned an initial A2 rating by Moody's in advance of this first bond sale. 

The Bond Buyer article details some of the particulars about the KWA's bonding offering:

"In light of Flint's severe fiscal distress — the city has been under state controlled emergency management since late 2011 — the bonds feature a back-up pledge from Genesee County.

"The governments expect to make their payments from the system's revenues, but the debt carries the limited-tax general obligation pledge of both credits. Genesee has promised to cover Flint's payments within 15 days if the struggling city is unable to make its payments.

* * *

"Flint is set to no longer receive water from the DWSD as early as April 17, relying on its own water treatment plant and water drawn from the Flint River. The city expects to see significant savings from the move.

"Genesee will pursue a separate contract with the Detroit system through at least 2016. The DWSD and Genesee are also negotiating a separate contract that would require Detroit to provide a long-term emergency stand-by service if the new system fails.

The bonds sold by Genesee County will mature in 30 years and are payable from the water supply contracts as well as Long Term General Obligation (LTGO) pledges of the City of Flint and Genesee County.

For more background on the Karegnondi Water Authority, click here. 

For more about DWSD Update, click here.

Update (4/2): Bloomberg is reporting (here) that KWA completed its $220 million bond sale yesterday.

"The water agency's sale included debt maturing as late as November 2043 that priced to yield 4.89 percent, or about 1.2 percentage points more than benchmark munis. The securities are rated A2 by Moody's Investor Service, five steps below the top."

City of Detroit Files Chapter 9 Bankruptcy: What's next for DWSD?

Earlier today, the City of Detroit's Emergency Manager, Kevyn Orr, signed and filed a petition for Chapter 9 bankruptcy*, the largest municipal bankruptcy in U.S. history.  

For a copy of the bankruptcy petition filed earlier this afternoon in the U.S. Bankruptcy Court in Detroit, click here.  

How will this affect the Detroit Water and Sewerage Department? 

Comment: I fully expect that DWSD to become an independent water authority, as outlined by the EM on June 14, 2013. That was the direction the Department was headed even before the EM was appointed. What will that look like? How long will that transition take? Stay tuned.  

 If you'd like to get a copy of Detroit's bankruptcy petition, write me here, and put "Detroit Chapter 9" in the subject line. 

* For those readers with a PACER account, the case has been assigned Case No. 13-53846.

Update (7/19): The Hon. Steven W. Rhodes has been assigned to this case by the Chief Judge for the Court of Appeals for the Sixth Circuit.  Judge Rhodes is a highly respected jurist, who has served as a bankruptcy judge for 28 years in the Eastern District of Michigan. He was recommended unanimously by the other bankruptcy judges in the Eastern District of Michigan.     

For more about DWSD Update, click here.

Detroit Water and Sewer Bonds Downgraded to Junk Status

On July 3, 2013, Standard & Poors downgraded its rating of Detroit water and sewer bonds to junk status. The rating agency reduced its rating on $5.42 billion bond debt to BB-minus from A and A-plus. This action was taken due to the potential the debt could be restructured by Detroit's Emergency Manager, Kevyn Orr. Uncertainty about the EM's future actions, including a possible bankruptcy, weighed heavily in S&P's decision. 

On April 1, 2013, Fitch Ratings reduced Detroit's water and sewer bond debt to BBB and BBB-plus.

For prior posts about DWSD's water and sewer debt rating, click here.

For more about DWSD Update, click here. 

Fitch Downgrades Detroit Water and Sewer Bonds

On April 1, 2013, Fitch Ratings downgraded its rating of $5.87 billion in Detroit water and sewer bonds. Fitch revised its Rating Outlook to Negative from Stable.  

About $1.9 billion of senior lien water revenue bonds were cut to BBB-plus from A, $1.1 billion of second lien water revenue bonds were downgraded to BBB from A-minus, $1.9 billion of senior lien sewer revenue bonds were cut to BBB-plus from A-minus, and $974 million of second lien sewer revenue bonds were lowered to BBB from BBB-plus.

The factors ininfluencing Fitch's decision are discussed here. 

For prior posts about DWSD's debt rating, click here.

For more about DWSD Update, click here. 

Moody's Cuts Detroit Water and Sewer Bond Rating Again, Increased Risk of Detroit Bankruptcy Cited

The City of Detroit's deteriorating financial position and political dithering continues to affect DWSD's bond rating. 

On Wednesday [11/28], Moody's Investor Service downgraded the Department's water and sewer bond rating for the second time in 7 months. 

Concurrently, Moody's has downgraded the ratings for the Detroit Water and Sewage Enterprise Revenue debt one notch to Baa3 (Senior Lien) and Ba1 (Second Lien) as the rising risk of a city bankruptcy filing brings ongoing uncertainty regarding the treatment of these securities in the event of a filing. Ratings for the Detroit Water and Sewage Enterprise Revenue Bonds have been removed from review for possible downgrade and the outlook has been revised to negative. The negative outlook for the water and sewer debt is based on the increasing possibility that the city could file for bankruptcy over the next 12 to 24 months. 

The last downgrade of DWSD's bond rating by Moody's occurred on April 9, 2012, as we reported here.  

For more about DWSD Update, click here. 

DWSD Sewer Bond Sale Postponed (UPDATED)

Reports in the financial media (here, here, and here) indicate that the Detroit Water and Sewerage Department is postponing the sale over $596 million in new sewer bonds, which was scheduled for June 14, 2012.  

The precise reasons for this decision are not known at present, but the decision is undoubtedly tied to reports that the City of Detroit is about to run out of cash by June 15, 2012. This follows the lawsuit by the City's Corporation Counsel seeking to invalidate the Consent Agreement negotiated between Governor Rick Snyder and Mayor Dave Bing.

Check back for more details as this story unfolds. 

Update (6/13): The Bond Buyer has a very detailed article this morning (here) about the reasons why the DWSD bond sale was postponed, as well as the swap agreements that will be terminated using some of the proceeds.  In the short, DWSD is waiting for the City of Detroit to make Friday's $34.2 million debt payment.  The Bond Buyer, citing COO Matthew Schenk, reports that DWSD will bring its bonds to market next Wednesday (6/20). According to Mr. Schenk, the one week delay will "allow time for the city and state to work through their resolution of the city's upcoming bond payment. Upon resolution and disclosure of the bond payment to the market, we will proceed with the transaction."

The Bond Buyer article also notes that DWSD "could face a liability tied to interest-rate swaps that hedge $800 million of Detroit pension obligation debt." Stay tuned. . . 

Update (6/15): Citing Water Board Chair, James Fausone, Crain's Detroit Business is reporting (here) that  DWSD will return to the bond market next Wednesday, June 20th.

Update (6/20): Despite a spate of bad news, the Wall Street Journal reports (here) that DWSD sold $667 million worth of sewer bonds today. Strong demand allowed the Department to lower yields on the bonds by 10 basis points. An uninsured 2039 bond offered a yield of 5.30%, while a 2039 bond insured by Assurance Guaranty Municipal Corp. yielded 5.00%.  

Update (9/13): Bloomberg Businessweek reports (here) that $314 million of the sewer bonds sold in 6/20/12 went to banks to pay off interest-rate swap agreements, and that $222 million raised in December, 2011 selling bonds went to pay off swap agreements. That's $536 million dollars in about 6 months! No wonder the Department has to consider slashing its workforce by some 81%. 

For more about DWSD Update, click here. 

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.

Detroit Water and Sewer Debt Downgraded by Moody's (UPDATED)

Earlier today, Moody's dropped 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 last major cut occurred in December, 2010, as we reported here.

Thomson Reuters reports (here) that Detroit's water and sewer systems could also be liable for some portion of an estimated $350 million the City of 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.

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 
  

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.

$4.6 Billion in DWSD Water, Sewer Revenue Bonds Downgraded

On December 20, 2010, Moody's Investor Service lowered its rating on $4.6 billion of water and sewer bonds issued by the Detroit Water and Sewerage Department.

Moody's lowered to A1 from Aa3 the credit rating on $1.43 billion of outstanding sewer bonds secured by a senior lien pledge of net revenue, and lowered to A2 from A1 on $1 billion of revenue debt secured by a second lien. At the same time, Moody’s lowered to A1 from Aa3 the rating on $1.54 billion of senior lien water bonds and to A2 from A1 on $660 million of second lien water bonds.

All of Detroit's water and sewer revenue bonds are now graded in the "Upper Medium Grade" category, down from "High Grade." Moody's also revised its outlook for Detroit's water and sewer bonds to negative.

Moody's cited the risk from interest-rate swaps and "lean financial flexibility" that could crimp Detroit's ability to service this debt. Moody’s said debt service coverage on the bonds has diminished amid the economic slump that has hit the Detroit area and because of large payments it may face to cancel interest- rate swaps.

DWSD, Detroit Seek to Remarket Debt

The Bond Buyer reports (here) "Detroit today [March 17, 2009] will begin to remarket $120 million of variable-rate, A-rated water revenue debt into a fixed-rate structure - the first time the city has entered the market since all three rating agencies downgraded its general obligation debt into junk-bond territory. "


The City will begin remarketing another $300 million of varible-rate sewer debt into fixed-rate debt within two weeks.


The article notes that most of the bonds are bank bonds, and that Detroit enters the market under a certain amount of "liquidity pressure." Detroit must remarket these bonds before April 1, 2009 or face the start of an accelerated five-year amortization.