Market participants are anticipating the return of the City of Detroit Water and Sewage Department to the municipal market. This is a big deal because it is the last debt refunding under the City of Detroit’s authority. As part of Detroit’s bankruptcy plan, the department is to be split off from the city. On January 1, 2016, all debt and operations of the department will move to a new regional organization called the Great Lakes Water Authority (GLWA), which will serve the department’s customers in Detroit and, importantly, the surrounding areas near the city. The city will be compensated with a 40-year $50 million annual lease payment, but the lease payments must be used for city water and sewer infrastructure needs.
The formation of the GLWA and transfer of water and sewage operations to a regional organization should be a great benefit for the region’s water and sewer customers and to existing bondholders. It should also be a positive credit driver because it (1) clears up and removes any potential default risk associated with the City of Detroit, (2) reduces the involvement of the Detroit City Council in rate setting policy and (3) better aligns the organization’s operations with its mission. Because a majority of the Department’s activities and billing occur outside the city’s boundaries, the future GLWA will tackle issues with a regional board and a regional mandate. The credit is also of interest because of a large divergence in rating agencies’ opinion, with S&P rating the credit A- and Moody’s Baa3, which has the potential to create attractive pricing levels on the bonds.
Sources: SNWAM Research, Bond Buyer, Moody’s Ratings and S&P Ratings