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S&P downgrades DPS bonds again, into junk territory

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Some Detroit Public Schools debt has been downgraded again — this time, into junk territory.

The credit rating agency S&P Global lowered its rating on two sets of bonds, issued in 2011 and 2012. DPS still owes more than $200 million on them.

S&P says its concerns stems from district’s recent restructuring.

To avoid a potential bankruptcy, the state split DPS in two — with the “old co” existing only to re-pay historic debts with local tax revenues.

The bonds S&P downgraded had been backed by state school aid funds, which now go to the “new” district. That worries investors, who consider the new arrangement less secure.

“The downgrade is based on the lack of a formal plan regarding bondholder repayment terms … and the resultant elimination of a pledged revenue stream at the end of the state’s fiscal year,” S&P analysts wrote.

Another longer term concern: A millage to fund the “old co” needs is up for renewal 2022. That means voters will be asked to keep paying for a district that now exists only on paper.

This is the second time S&P has downgraded these particular DPS bonds in a little over a month, and the agency made clear that they remain on “CreditWatch negative,” meaning they could be lowered even further into junk bond territory without more assurance of full repayment to bondholders.

“The CreditWatch on the bonds reflects our view that the complexity of the situation, the looming requirement to redeem, defease, or refund the bonds, and the numerous parties involved — including the split district and Michigan — result in a more than 50% chance we will lower the rating over the next two months,” analysts wrote.

It’s not immediately clear what the downgrades mean in practical terms.

The state emergency loan board recently approved a $235 million loan to help DPS refinance old bonds that had been backed with state aid payments.

The interest rate on those bonds “should not exceed 18%,” but state officials insist it should be much lower.

Sarah Cwiek joined Michigan Public in October 2009. As our Detroit reporter, she is helping us expand our coverage of the economy, politics, and culture in and around the city of Detroit.
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