Detroit on Review by Moody’s Will Pay $211 Million to Cut Swaps
December 08, 2011, 7:46 PM ESTBy Chris Christoff
Dec. 8 (Bloomberg) -- Detroit’s general-obligation bond rating may be cut by Moody’s Investors Service, which cited a potential state takeover, as Michigan’s biggest city readies a bond sale that will include $211.6 million to unwind swap deals.
The city would pay about $294.7 million to undo some of the interest-rate swap contracts linked to water and sewer debt while getting almost $83.1 million for unwinding others, a preliminary offering document shows. Detroit also faces payments of about $400 million tied to swaps on pension-system financing if Michigan takes over, Moody’s said yesterday in a statement.
“The state appointment of an emergency manager would in turn trigger a termination event under the city’s swap agreements,” Moody’s said. The pension swap agreements are with Zurich-based UBS AG and Siebert Brandford Shank & Co. in New York, the rating company said.
Michigan Treasurer Andy Dillon said Dec. 2 that a preliminary examination of the city’s finances would begin this week, the first step toward a state takeover and the reason cited by Moody’s for putting the credit under review. At Ba3, Moody’s already grades Detroit’s general-obligation bonds three steps below investment level. The New York-based rating company is also reviewing the city’s water and sewer debt.
Path Toward Court
Putting the city’s finances under an emergency manager “is a requisite step in the path toward state approval for a bankruptcy filing,” Moody’s said. While the risk of Detroit seeking court protection is “rising” it remains “low,” the company said.
Moody’s also cited a potential for the repeal of Michigan’s emergency manager law, under a statewide ballot measure next year. The statute covers financially distressed municipalities and school districts.
Detroit may sell $493.4 million in water and sewer bonds as soon as next week to pay for construction, to unwind the swaps and to refinance part of the system’s $2.18 billion in securities outstanding, according to the preliminary document.
Dillon and Republican Governor Rick Snyder have said they want to avoid a state takeover of Detroit, Michigan’s biggest city. Mayor Dave Bing, a Democrat, and the City Council face a $44 million cash shortfall by June 2012, in addition to an existing $155 million budget deficit.
--With assistance from Michelle Kaske. Editors: Ted Bunker, Pete Young.
To contact the reporter on this story: Chris Christoff in Lansing at cchristoff@bloomberg.net
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
