Detroit Water, Sewer Bonds Downgraded Deeper Into Junk

Detroit’s water and sewer bonds were dropped five levels to CCC from BB- by Standard & Poor’s -- its fifth-lowest grade -- citing a possible default as the city goes through the largest U.S. municipal bankruptcy.

City Emergency Manager Kevyn Orr’s plan to reduce $18 billion in debt classifies such bonds as secured while calling general obligations unsecured. Investors in the $3.7 trillion municipal-bond market are watching the Chapter 9 proceedings to see how various debt classes are treated.

“We lowered our rating because we view the obligations as currently vulnerable to nonpayment,” said Standard & Poor’s credit analyst Scott Garrigan in a report yesterday. Orr may offer holders of water and sewer bonds less than promised -- tantamount to default, the report says.

The city’s water system, which serves about 40 percent of Michigan’s population, accounts for $5.8 billion of Detroit’s debt. Orr has proposed leasing the system to a new regional public authority to help pay for services. Surrounding counties have so far balked.

The Detroit Water and Sewerage Department plans to issue $150 million of bonds in June through the Michigan Finance Authority, according to Terry Stanton, a spokesman for state Treasurer Kevin Clinton.

Moody’s Investors Service rates the water department’s senior debt B1, and Fitch Ratings has the securities at BB+, both below investment grade.

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