Fitch Affirms Detroit DDA, MI Ratings at 'BB+'/'BB'; Outlook Stable

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+';

--$3,310,000 tax increment bonds (Development Area No. 1 projects), series 1998C (junior lien), at 'BB'.

The Outlook is Stable.

SECURITY

Bonds are secured by a pledge of tax increment revenues captured by Development Area No. 1 net of those captured for school district purposes (school capture). The bonds are additionally secured by cash-funded debt service reserves.

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.

DDA ADEQUATELY INSULATED FROM DETROIT: Fitch believes that the DDA is adequately insulated from Detroit's bankruptcy filing and recent defaults. The city's bankruptcy plan of adjustment does not include DDA debt, respecting the definition of special revenues under Chapter 9 of the U.S. Bankruptcy Code.

HIGH TAXPAYER CONCENTRATION: The district encompasses the core of downtown Detroit, including many key commercial assets. General Motors Co. (GM) represents a very high 22% of taxable value (TV) for fiscal 2014, and the top 10 taxpayers, representing 49% 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 Positive Outlooks on the Issuer Default Ratings (IDRs) of both GM and Ford Motor Co. (Ford).

RATING SENSITIVITIES

CHANGE IN TAX BASE: Fitch expects that captured value (CV) will stabilize, since large appeals have been settled, but a significant change in either direction could affect the rating.

INTERRUPTION OF TAX INCREMENT REVENUE FLOW: The rating would be downgraded should the city or county delay property tax payments to the DDA.

DEBT SERVICE RESERVE FUNDING: The ratings assume that the cash-funded debt service reserve fund (DSRF) will remain available to compensate for potential pledged revenue declines over the period leading up to the planned junior lien defeasance. A change to a surety-funded DSRF without a defeasance would result in a downgrade of the outstanding ratings.

CREDIT PROFILE

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. Captured value 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 1.17x for senior lien MADS and 1.06x for combined senior and subordinate MADS in fiscal 2014. Pledged revenue has declined a cumulative 19% since fiscal 2011, largely due to an appeal by GM, which has been settled. Fitch does not expect CV or pledged revenue to decline at the same pace, 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 reflects the project area's high tax base concentration, with the 10 largest taxpayers making up 49% of captured value in 2012. In addition to GM at 22%, several taxpayers are office buildings that rely for occupancy to some extent on the auto industry. Prospects for the industry have improved. Fitch's IDRs for both GM (at 'BB+') and Ford ('BBB-') have a Positive Outlook. Additional private residential and commercial development, including 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 17.7% in July 2014. The decline from 19.1% in July 2013 was driven primarily by labor-force loss. Already very weak city income and poverty figures are worsening; both per capita and median household income are declining 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.

DDA ADEQUATELY INSULATED FROM DETROIT BANKRUPTCY

The DDA is a public authority, created by the city and governed by a Mayor- and council-appointed board. As the DDA is a separate entity, Fitch's rating assumes no direct connection between the city and the DDA as it relates to a default or bankruptcy by the city. In addition, the city's bankruptcy plan of adjustment does not include DDA debt, and respects the definition of special revenues under Chapter 9 of the U.S. Bankruptcy Code. Property tax payments continue to be remitted to the DDA from the city as scheduled.

A long-standing $33.6 million loan to the city from the DDA was included in the city emergency manager's proposal as unsecured debt and is not expected to be repaid. Prior to the city's bankruptcy the DDA prudently reserved against the full value of the loan. Fitch believes that this accounting adequately insulates the DDA's finances from a city loan default.

ANTICIPATED DEBT REDEMPTION DOES NOT ALTER SENIOR LIEN CREDIT QUALITY

The DDA is planning in the near future to increase both debt and pledged revenues to provide funds for the construction of an events center within Development Area No. 1. The debt will be issued by the Michigan Strategic Fund under a newly created indenture, and will be subordinate to outstanding debt. The DDA expects to defease about $11 million in senior lien debt with a combination of cash on hand and reserve fund releases, and to close the existing indenture to new issuance. Outstanding junior lien debt would be defeased in its entirety.

The defeasance would increase 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. Any incremental benefit from the defeasance and lien closure is offset by the planned replacement of a cash-funded DSRF at the maximum allowable by the IRS with a surety.

PERSONAL PROPERTY TAX EXEMPTION NOT MATERIAL

Voters approved state legislation in August 2014 that exempts eligible industrial and commercial property from taxation. About 16% of the DDA's taxable property is classified as personal. However, the law requires the legislature to appropriate an amount equal to the loss for certain types of districts, including tax increment finance authorities such as the DDA. Therefore Fitch does not expect the legislation to affect pledged revenue.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=902654

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