Kevin Bain,
Director of Strategy
S&P Global Ratings has raised Detroit’s General Obligation (GO) debt to a BB+ rating, noting the City’s strong fiscal management, positive financial results and improvements to reserves and liquidity. At the same time, S&P upgraded its rating on Detroit’s Public Lighting Authority and Income Tax backed debt issued through the Michigan Finance Authority (considered Priority-Lien debt because of their pledge of specific tax revenues) to BBB from BBB-. Additionally, S&P assigned a positive outlook to both GO and Priority-Lien debt: “The positive outlook reflects our view of Detroit's recent revenue growth and forecasts showing that it can follow through with its financial plan,” signifying an expectation of another rating upgrade in the next one to two years.
S&P’s credit action follows an equivalent rating upgrade to Ba1 from Ba2 issued by Moody’s earlier this month, also with a positive outlook. The back-to-back announcements highlight the incredible progress since the City entered bankruptcy just under 10 years ago.
S&P remarked that, “Ten years on from its bankruptcy filing, Detroit's financial position and economic condition are the strongest they've been in decades. Liquidity and reserves are at record levels, the debt burden is manageable, population decline is flattening, the stock of blighted and vacant properties is down considerably thanks to extensive city-managed programs, assessed property values have increased in five consecutive years […], and taxable wages continue to grow.”
Cusp of investment grade
Both rating agencies have Detroit one notch away from investment grade. This is the highest rating the City has held from S&P since the beginning of 2009. Improved bond ratings are indicative of a city’s finances and financial profile, and higher ratings mean lower costs for governments when they borrow funds to pay for various capital improvements.
While the Plan of Adjustment (POA) and restructuring process provided support to recover, as well as recent federal aid from the pandemic, S&P attributed much of the positive developments to the City’s own strong management.
“In our view, concerted management action and institutional support to not only recover from bankruptcy, but to revitalize Detroit's economy and finances, enabled the city to capitalize on its situation. The post-financial-crisis economic recovery aided the city, but city policies (such as increasing public safety responsiveness and revamping public lighting) and new economic development initiatives expanded opportunities and buttressed the city's reputation, accelerating credit improvements. These improvements are significant compared with forecasts in the POA.”
S&P further indicated the potential upside scenario for Detroit if the city maintains adherence to its financial plan:
“All else equal, we could raise the rating if it becomes apparent that RPF draws will not accelerate over the next several years, increasing the certainty that pension contributions can be absorbed within the operating budget. Ongoing revenue growth and improvements in macroeconomic conditions could also contribute to a higher rating.”
Detroit Chief Financial Officer, Jay Rising noted:
“The back-to-back ratings upgrade from Moody’s and now S&P reflect the overall success of the financial and economic strategies the City has employed. S&P’s upgrade and positive outlook validate that belief that the creation of a safer, healthier, beautiful and economically vibrant City have driven positive financial results.”
