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Detroit Bonds Cut Deeper Into Junk as Cash Crunch Nears

Detroit had its bond ratings cut deeper into noninvestment-grade territory by Moody’s Investors Service, citing a cash crisis that may mean bankruptcy or default in the next 12 to 24 months.

“These downgrades reflect the city’s ongoing precariously narrow cash position and a weakened state oversight framework,” Moody’s analysts Genevieve Nolan and Henrietta Chang said in a statement from the New York-based credit-scoring company. The downgrades affect $8.2 billion in Detroit debt, according to David Jacobson, a Moody's spokesman.

Michigan voters on Nov. 6 repealed a 2011 law that gave state-appointed emergency managers sweeping authority to fix distressed cities’ finances, including the power to cancel union contracts. Detroit’s inability to enact changes demanded under a consent agreement with the state also led to the downgrade and a negative outlook on the ratings, according to the analysts.

Moody’s dropped the city’s general obligation unlimited tax bonds and certificates of participation one step to Caa1, seven steps below investment grade, from B3. It cut Detroit’s general obligation limited tax debt to Caa2 from Caa1, and lowered ratings on water and sewer revenue securities as well.

Detroit may run out of cash in December as the result of a dispute between Mayor Dave Bing and the City Council over hiring Miller Canfield Paddock & Stone PLC , a law firm, for advice on the state fiscal recovery plan. Michigan has refused to release $30 million from a bond sale to stabilize municipal finances unless a law firm is hired as an adviser under a revised plan.

Bing said last week he would impose unpaid time off for municipal employees starting in January to cope with the cash shortage, and said the city wouldn’t seek bankruptcy protection.

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