NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its ratings on the following Detroit Downtown Development Authority, Michigan (the DDA) bonds:
--$44,525,000 tax increment refunding bonds (Development Area No. 1 projects), series 1998A, at 'BB+';
--$16,055,000 tax increment bonds (Development Area No. 1 projects), series 1998B (taxable), at 'BB+'.
The Rating Outlook is Stable.
Bonds are backed by a pledge of tax increment revenues captured by Development Area No. 1 net of those captured for school district purposes (school capture). The debt service reserve (DSR) is funded with a surety policy.
KEY RATING DRIVERS
LIMITED MARGINS: The below investment-grade ratings reflect thin coverage from a source of pledged revenue that has declined significantly in the past few fiscal years, although modest growth was registered in fiscals 2014 and 2015.
HIGH TAXPAYER CONCENTRATION: The district encompasses the core of downtown Detroit, including many key commercial assets. General Motors Co. (GM) represents a very high 21% of taxable value (TV) for fiscal 2015, and the top 10 taxpayers, representing 55% of the total, are largely related to the automobile industry.
EXCEPTIONALLY WEAK ECONOMIC INDICATORS: The city's income, employment, and demographic indicators continue to be among the weakest in the U.S. Many recent data points indicate continued erosion.
IMPROVED AUTO MANUFACTURING PROSPECTS: The health of the U.S. automobile industry continues to improve, as evidenced by Fitch's recent upgrade (June 2015) to the Issuer Default Rating (IDR) of GM and continued Positive Outlook on the IDR of Ford Motor Co. (Ford).
DDA INSULATED FROM DETROIT: Fitch believes that the DDA is adequately insulated from Detroit's financial performance going forward. The city's approved plan of adjustment does not include DDA debt and respects the definition of special revenues under Chapter 9 of the U.S. Bankruptcy Code.
CHANGES IN TAX BASE: Fitch expects that the DDA's captured value (CV) will remain stable, since large appeals have been settled. However, CV growth leading to materially improved coverage could result in an upgrade.
The DDA was formed in 1976 to promote economic development in downtown Detroit. Development Area No. 1 comprises 615 acres, roughly coterminous with the downtown business district and represents about 7% of the city's TV. In addition to the GM-owned Renaissance Center, the district includes one of the city's three casinos, stadiums for the Detroit Lions and Detroit Tigers, and development along the city's waterfront. CV is a moderate 131% of the base, exposing pledged revenue to a large degree of volatility for a given decline in TV absent a change in tax rates.
WEAK COVERAGE FROM PLEDGED REVENUES
Coverage from pledged revenue remains very thin at an estimated 1.21x maximum annual debt service (MADS) in fiscal 2015. Pledged revenue rebounded by a modest 1.1% in fiscal 2014 following a cumulative 19% decline between fiscal 2011 and fiscal 2013. Declines were largely due to an appeal by GM, which has been settled. Pledged revenues covered senior lien debt service by a slim 1.16x in fiscal 2013 before notching up to 1.18x in fiscal 2014.
Fitch does not expect CV or pledged revenue to decline significantly in the near term, but incorporates into the rating the potential for modest further erosion. The majority of the DDA's tax increment revenues are remitted by the city with a smaller portion passing through from the county.
TAX BASE CONCENTRATION AND WEAK ECONOMIC ENVIRONMENT
The rating also reflects the project area's high tax base concentration, with the 10 largest taxpayers making up 55% of TV and more than 95% of CV in 2015. In addition to GM, several large taxpayers are office buildings that rely for occupancy to some extent on the auto industry. Prospects for the industry have improved. Fitch upgraded the IDR of GM to 'BBB' and Ford ('BBB-') has a Positive Outlook. Additional private residential and commercial development, including investment by Quicken Loans, a trolley connection to Wayne State University, and construction of an events center and surrounding mixed-use facilities by Olympia Development, may benefit the tax base.
The city's economic indicators continue to be exceptionally weak despite apparent auto industry improvement, including an unemployment rate of 13.7% in June 2015 that is down from 17.7% the year prior. The decline was driven primarily by labor-force losses rather than employment gains. Very weak city income and poverty figures have not yet stabilized; per capita income declines have plateaued whereas median household income continues to decline while the nation's improves slightly. After a 25% drop in population from 2000-2010, recent estimates indicate a further decline of 3.5% to 688,701 in 2012.
DEBT REDEMPTION DOES NOT ALTER SENIOR LIEN CREDIT QUALITY
The DDA increased both debt and pledged revenues to provide funds for the construction of an events center within Development Area No. 1 that is currently under construction. The debt was issued by the Michigan Strategic Fund under a newly created indenture, and is subordinate to outstanding debt. The DDA defeased about $11 million in debt with a combination of cash on hand and reserve fund releases, and closed the existing senior lien indenture to new issuance.
The defeasance increased senior lien MADS coverage only slightly. Coverage is already close to the minimum required to issue new debt under the additional bonds test (ABT). Thus, in Fitch's view the closure of the lien, while generally a credit positive, has minimal impact on credit quality in this case. The incremental benefit from the defeasance and lien closure is also offset by the replacement of a cash-funded debt service reserve fund at the maximum allowable by the IRS with a surety.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form