Detroit returns to investment-grade credit rating a decade after historic bankruptcy

Detroit — The city of Detroit has received a credit rating upgrade from Moody's Investors Services that returns the city to investment-grade status a decade after its historic bankruptcy filing.

The city received a Baa2 grading from Moody's, a 10-grade increase from its Caa3 rating — a poor standing with very high credit risk — in June 2013.

Mayor Mike Duggan touted the ratings agency's two-notch upgrade to investable: "It's a rarity."

"This isn't a day I expected to see, but the city of Detroit has been returned to investment grade credit rating for the first time in 15 years," Duggan said at a news conference at the Detroit Police Department Headquarters on Monday. "When the emergency manager left in 2014, there were a lot of dire predictions. They said Detroiters 'couldn't be trusted with self-determination' ... and what we have done since is 10 credit rating upgrades in less than a decade."

Duggan further said the city has “far surpassed the expectations of the (bankruptcy) Plan of Adjustment” in terms of jobs and revenue growth, budget fund balances, employment and home values: "Remarkably, the city of Detroit has higher credit ratings than a lot of other cities in the country, cities we were looking up to for a long time."

The Moody's report, which forecasts the next 12-18 months, indicates Detroit "still faces elevated social risks and a comparatively weaker economy than many of its peers. It must also contend with cost pressures and a restrictive revenue-raising framework. However, the city's ample fund balance and limited fixed costs will support the credit profile should these or other pressures emerge."

Despite credit pressures, Detroit's tax base valuation doubled over the past five years, according to the Moody's report. Ongoing development and appreciation of residential values "will provide another boost in fiscal 2025. The city's financial ratios are robust after a decade of solid financial performance," according to the report.

Detroit has about 640,000 residents, according to the 2020 Census, making it one of the 30 largest cities in the United States and the largest city in Michigan. About three-quarters of the city's revenue is for its governmental activities and the remaining quarter is business-type activities, primarily water and sewer, Moody's noted.

The mayor said his meetings with credit rating agencies "have been tense the last few years." He suspects their most recent two-notch upgrade is attributable, in part, to how the city spends its $826 million from federal pandemic relief dollars known as the American Rescue Plan Act.

"So many cities took a good chunk or all of their federal money and put it into their budget to balance it, and the City of Detroit didn't put $1 into balancing our budget because we were already balanced. We put those investments into our parks, into our recreation centers and into our folks," Duggan said. "I think it's going to accelerate Detroit's growth by 10 years."

After exiting bankruptcy a decade ago, Duggan said the Plan of Adjustment left by Emergency Manager Kevyn Orr had no means to pay for the retirees' pension fund starting in 2023 at $150 million a year. He thanked Detroit's City Council for helping avoid a pension cliff by establishing a $479 million Retiree Protection Fund.

Last April, Moody’s upgraded Detroit’s rating to Ba1 with a positive outlook. And in 2022, Detroit was upgraded from Ba3 to Ba2, which was the city’s first upgrade from Moody’s since 2018.

"To me, the rating agencies have upgraded us is evidence of both our performance to date as well as what they think our performance in the future is going to be," Chief Financial Officer Jay Rising said.

Peter Scher, vice chairman of JPMorgan Chase & Co., told The Detroit News the upgraded credit rating is a reflection of strong leadership from political and community figures, as well as support from the private sector. The New York-based bank has made more than $200 million in investments the Detroit area since 2014 when it announced a $100 million, five-year commitment. That commitment set a template for similar ones in Chicago, San Francisco and other places.

He cited per capita income growth, more Detroiters who have bank accounts, improved credit scores and an additional $20 billion in deposits at JPMorgan Chase in the city during that time period as signs that Detroit has been moving on the right track and ultimately fostering confidence.

“You can’t overestimate confidence,” Scher said. “Ten years is not a lot of time in the scheme of things. I've never seen as dramatic of a turnaround like we've seen in Detroit any place else.”

How Detroit fares

Moody's rates from a Aaa scale to C. Non-investable grades start at Ba1, meaning they are judged to have speculative elements and are subject to credit risk. Detroit has moved up two grades to Baa2, meaning it is subject to moderate credit risk. They are considered medium-grade and, as such, may possess speculative characteristics. The next notch would be Baa1 status and then A3.

The status of investment-grade and non-investment grade is a somewhat psychological difference in terms of marketing and investors' perceptions, said Anand Jha, Finance Department chair at Wayne State University. But it unlocks a greater community of potential buyers since many institutional investors — from banks to pension funds to universities — won’t invest in junk bonds or have a policy that a certain percentage of their investments must be in investment-grade sources. Unlocking that greater supply of investors offers the opportunity to borrow money at a lower rate, freeing up funds to invest elsewhere.

“Even if it is a small amount, say 0.1%, even if it was that amount, that’s huge because there is so much borrowing,” Jha said. “The dollar amount is going to be huge. The savings are huge.”

In comparison, Cleveland is a step lower than Detroit at Baa3. Milwaukee, at A3, is two notches above Detroit, making it upper medium investment-grade. Cincinnati and Miami are six steps higher than Detroit at Aa2, which is known as high investment grade. Indianapolis has a prime rating of Aaa, the highest credit rating, which now is eight steps above Detroit.

Joshua Benson, Milwaukee's capital finance manager who runs the city's borrowing program, told The News that any A-level credit ratings open possibilities.

A decade ago, Milwaukee was an Aa2 and dropped two grades to an A1. The city has had several changes to its revenue structure, including a new sales tax and upgrades to its pension system. "We've been told it will take several years to see an upgrade based on that," Benson said.

"In general, it does take a lot longer to grow a credit rating than it does to get the credit rating cut. Detroit has seen positive financial movement over the past decade. Ten years ago, it was looking pretty dire, and today, it's looking a lot better. But there's still that distaste in the rating agencies months and maybe some of the investor's mouths of the name because of the bankruptcy."

Multiple notch rating swings are rare and "it's typically in the downward trajectory," Benson said. "This is the first I've ever heard of a multiple-notch upgrade. That doesn't mean it hasn't happened before, but it's notable."

The boost is a sign that outsiders, not just Detroiters, think the city has a future, Erik Gordon, a professor at the University of Michigan’s Ross School of Business, told The News in an email.

“To buy Detroit's bonds, investors have to believe that the city has the means to repay and the self-discipline to repay. For many years leading to the bankruptcy and for most of the decade after the bankruptcy, both beliefs were in doubt," Gordon said.

Detroit City Councilmember Fred Durhal III, who also serves as chair of the budget finance committee, said he hoped the boost will allow the city to invest more in infrastructure with lower interest rates.

"Our property values now are higher than Miami. We are moving forward here in the city of Detroit, and it is indicative of our fiscal responsibility, of great leadership and of sacrifices that even our residents have made to bring our city back," said Durhal, who represents District 7. "It's a remarkable turnaround. We are the phoenix rising from the ashes."

Duggan applauded city residents for approving a $250 million bond in 2020 known as Proposal N to demolish thousands of abandoned houses that were depressing property values. He said the Detroit Land Bank will be "out of abandoned houses by the end of next year."

"We also have to thank the businesses. We are in the situation we are in because the income tax revenues have exceeded everyone's expectations," Duggan said. "We went from a 20% unemployment rate to an 8% unemployment rate, and we finally have Detroiters paying income taxes.

"Those are because of the Jeep plant, what Ford is doing at the train station, what General Motors is doing at Factory Zero, what Amazon is doing, what Dan Gilbert, Chris Ilitch and Gary Torgow have done in improving office buildings and housing and moving people in and what City Council has done in approving those projects."

Duggan gave city employees in attendance bottles of black ink as souvenirs to celebrate their return to an investment-grade credit rating.

Why black ink? "People don't remember the days of red ink," he said, "and that's a great thing."

srahal@detroitnews.com

bnoble@detroitnews.com