The powerful credit ratings agency Standard and Poor’s has downgraded two sets of bonds issued by Detroit Public Schools.
The agency also expressed doubt about a new arrangement that splits the school district in two.
On Friday, new state laws took effect splitting the Detroit Public Schools into “old” and “new” districts.
The old one exists solely to pay off debt with tax revenues, while the new one receives state aid payments to educate students.
But that arrangement has raised doubts at S&P. This week, the agency announced that it would downgrade bonds DPS bonds issued in 2011 and 2012.
S&P says it’s no longer confident bondholders will be fully repaid, because the bonds are no longer backed by state aid payments, which go to the new district.
As it happens, these are the same bonds the new district is looking to refinance for that very reason.
Transition manager Steven Rhodes asked the Detroit school board to approve up to $235 million in loans to help with that refinancing.
The board rejected the request, over concerns about a possible spike in interest rates on the loan; Rhodes is now expected to take his request to the state emergency loan board.
The bonds are still investment-grade at this point, but S&P hinted that further downgrades are likely.
“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 three months, and could take more than one rating action during that time if warranted,” the agency said.