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S&P Lauds Michigan's Takeover of Detroit

Friday, 15 Mar 2013 | 5:15 PM ET
Michigan Governor Rick Snyder and Detroit Mayor Dave Bing
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Michigan Governor Rick Snyder and Detroit Mayor Dave Bing

Standard & Poor's on Friday gave a thumbs up to Michigan's takeover of Detroit's finances, revising the city's credit rating outlook to "stable" from "negative."

"The appointment of an (emergency manager) allows the city to move forward in a more efficient manner, continuing to make the types of adjustments necessary to regain structural balance," S&P credit analyst Jane Hudson Ridley said in a statement.

Michigan officials on Thursday tapped Kevyn Orr, a bankruptcy attorney at law firm Jones Day, to run the state's biggest city, which has been plagued by budget deficits, a high debt load and an outdated and costly government structure.

Despite the brighter outlook, S&P kept its rating of Detroit's general obligation debt deep in junk territory at B, citing budget deficits since 2003, persistent cash-flow problems and a slew of long-term liabilities, including pension and retiree health-care costs and potential payments on interest-rate swaps.

The rating agency also pointed to Detroit's steep population decline that has depressed its revenue collections and monthly unemployment rates that have topped 20 percent.

"We are pleased to hear that the steps being taken to work with Detroit and return the city to firm financial footing are being recognized," said Terry Stanton, spokesman for Michigan Treasurer Andy Dillon.

There was no immediate reaction to the outlook change from Detroit Mayor Dave Bing.

Gov. Snyder on Detroit's Financial Blues
Detroit faces more than $14 billion in long-term debt and persistent cash flow issues. Michigan Governor Rick Snyder and Detroit's Emergency Financial Manager Kevyn Orr, explain whether Detroit is going into bankruptcy. Steve McMahon, Purple Strategies; Jim Pethokoukis, American Enterprise Institute; and Don Luskin, Tred Macro, weigh in.

Moody's, which rates Detroit even deeper into junk than S&P, said last week that while an emergency manager could alleviate political and operational challenges, the appointment opens a path for a bankruptcy filing by the city that could mean delayed or reduced payments to bondholders.

Orr, who worked on the restructuring of Chrysler and who will officially begin his job on March 25, could eventually recommend a Chapter 9 municipal bankruptcy filing for Detroit. If he were to do so, something that would require approval from Snyder, Detroit would rank as the biggest municipal bankruptcy ever in the United States.

Both Orr and Snyder have hinted that concessions may be sought from owners of the city's approximately $8.5 billion of outstanding debt.

Orr's appointment was another termination trigger for interest rate swap agreements that Detroit entered into in conjunction with debt sold for its employee pensions in 2006.

A termination was previously triggered nearly a year ago due to a Moody's rating downgrade of Detroit. City officials have been negotiating with counterparties UBS AG and SBS Financial Products Company since then to avoid having to pay as much as $440 million, or about 22 percent of its annual operating budget, over several years.

Spokespeople for the counterparties declined to comment on the latest trigger on Thursday.

Detroit's takeover is the first of any big U.S. city in over two decades. Previously, New York was nearly forced into bankruptcy in 1975 and Philadelphia was briefly taken over by the state of Pennsylvania in 1991.

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