Detroit Debt Cut by Fitch in Face of Possible Default This Week

Michigan's Governor Rick Snyder
Rick Snyder, governor of Michigan. Photographer: Jeff Kowalsky/Bloomberg

Detroit had its debt reduced deeper into junk status by Fitch Ratings, which cited the city’s potential default on a bond payment June 15 because of a legal dispute with the state over a financial rescue plan.

Mayor Dave Bing ordered the city’s top lawyer to drop a suit challenging the agreement, and said he’s consulting “outside legal experts” to go around her. Michigan Governor Rick Snyder’s administration said if the challenge isn’t dropped, the state will withhold $80 million.

The stalemate may leave the city unable to pay vendors or employees, Chief Operating Officer Chris Brown said June 11, the Detroit Free Press reported. Fitch, in its explanation for the ratings cuts yesterday, cited the suit by Corporation Counsel Krystal Crittendon.

“The fragility of both the city’s financial position and the relationships among branches of city government and between the city and state is highlighted by the instability triggered by the city attorney’s suit,” according to the report. “Even if this Friday’s debt service payment is made, unless the suit is settled promptly Fitch believes the city will likely imminently face another liquidity crisis.”

Fitch cut by two steps to CCC from B about $511 million in unlimited tax general-obligation bonds. The company also reduced $453 million limited tax general-obligation bonds two steps to CC from B-.

In addition, $1.5 billion in pension obligation certificates were cut three steps to CC from B, Fitch said in a statement. The rank is eight levels below investment grade and indicates an elevated default risk.

‘Working Aggressively’

While the city faces a cash-flow crisis, a bond default is not near, said Naomi Patton, a spokeswoman for Bing. The mayor and the state are “working aggressively to keep the city from running out of cash,” she said in an e-mailed statement.

In April, the city and state reached a deal to avoid the appointment of an emergency manager with broad powers to cut spending and run operations.

The city can’t legally enter into the agreement because the state owes it money, including $244 million in revenue sharing, $4.7 million in water and sewer fees and $1,225 in delinquent parking fees for state vehicles in the city, Detroit attorneys argued in Crittendon’s lawsuit.

Bing, in a June 11 letter to Crittendon made public yesterday, said she overstepped her authority and put the city’s financial stability at risk.

Expecting It

Unless the complaint is withdrawn, the state will withhold $80 million to repay interim bonds sold to keep the city solvent, state Deputy Treasurer Thomas Saxon wrote in a June 7 letter to Detroit’s chief financial officer, Jack Martin.

A procedural hearing is scheduled today in Ingham County Circuit Court. The state capital, Lansing, is in that county.

Because of the legal challenge, the rating downgrades “were not totally unexpected,” Brown, Detroit’s operating officer, said in a statement.

In the face of the crisis, the city yesterday delayed the sale of about $600 million in bonds for its water and sewer system. The sale had been planned for tomorrow.

“We just wanted to give the market more time to react to the headline news,” said Matthew Schenk, the chief operating officer of Detroit’s water and sewer department.

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