Detroit Considers Transfer of Water and Sewerage Department

As the City of Detroit considers the possible privatization of its water and sewer department, Gov. Rick Snyder told the Detroit Free Press on Wednesday that privatizing the whole system may not be practical.
In the absence of an agreement among city and suburban leaders on creating a regional authority to run Detroit?s water department, Snyder?s state-appointed emergency manager, Kevyn Orr, has been tasked to seek private bids from companies willing to manage the?system.
Snyder said he has given Orr the autonomy to find the best solution for operating the water and sewer system, possibly turning it into a revenue generator for the city while making sure that long-needed upgrades are paid for. Snyder said all options are on the table, although he downplayed the possibility of selling the system outright.

?I don?t think the likelihood of privatizing the whole system, selling the system, is that viable,? Snyder said in an interview with the Free Press Wednesday. He also said he wasn?t taking sides on the issue, letting Orr and suburban leaders hash out differences.

Orr?s office is currently studying several bids to privatize the Water and Sewerage Department and could have a selection process completed within two weeks, according to Bill Nowling, a spokesman for Orr?s office. Nowling would not release any information about which companies submitted bids by the June 1 deadline to operate and manage the system relied on by millions of people in southeast Michigan. Nowling said the bids are considered confidential under a federal mediation order.

?I can say we received several bids and the city is reviewing them,? Nowling said in an email. ?We hope to have the review and selection process done within the next two weeks. We will release the details at that time.?

According to the Free Press, Orr said last week at the Detroit Regional Chamber?s annual policy conference that he?s in talks with at least two of the largest U.S. private companies that operate water systems and has taken bids from them to manage Detroit?s sprawling water and sewer system that serves more than 4 million people in southeast Michigan.

The city is exploring privatization of the DWSD while negotiations continue with suburban county officials to create a regional water authority. Those negotiations are at a delicate stage as the trial to confirm Detroit’s restructuring plan is to start July 24.

In an analysis last week, Fitch Ratings warned that it might downgrade $5.7 billion of the city?s water and sewer debt to as low as D — junk status — from its current much higher ratings of BB-plus and BB if U.S. Bankruptcy Court Judge Steven Rhodes approves the city?s plan of adjustment as Orr has proposed it.
Fitch said the ratings agency is keeping the water debt on negative watch, meaning a downgrade is possible in the near future.

Orr?s plan to spin off the city?s water and sewer system into a regional operation has generated considerable controversy and is not yet approved. As part of a spin-off, Orr has proposed to refinance and restructure the department?s bond debt, a move that Fitch characterized as a distressed debt exchange that would reduce interest rates and put payments to bondholders in line behind an annual payment from the water system to the City of Detroit.

?Fitch believes that there is no legal basis to compel bondholders to accept such impairment as proposed,? Fitch analyst Adrienne M. Booker wrote in the report.

The ratings warning from an agency like Fitch has no immediate effect on the city?s?bankruptcy case. But it highlights how many players in the Wall Street municipal finance world remain leery of some of Orr?s proposals to restructure the city?s debt.

If agencies like Fitch were to downgrade the water department debt to junk status, it would cost the water system more to borrow money for future needs because lower ratings translate into higher interest costs for borrowers.

Some information in this news update was taken from reports by Fitch Ratings and the Detroit Free Press.

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