Fitch Rates Michigan's $1.425B GO Notes 'F1+'
2008-10-22 03:25:03 -
- Fitch Ratings assigns an 'F1+' rating to the State of Michigan's (the state) $1.425 billion full faith and credit general obligation (GO) notes, fiscal 2009, series A. The notes are expected to be offered through negotiation on Oct. 28, 2008. The notes are not callable and are due Sept. 30, 2009.
The notes are GOs of the state (GO bonds rated 'AA-' with a Negative Outlook by Fitch) payable from undedicated revenues. Security for the notes, however, resides in sufficiently available balances held in the common cash fund as the general fund is projected to close in deficit.
The estimated combined general and school aid fund's Sept. 30, 2008 year-end cash balance was negative $399.6 million and is projected at negative $435.2 million on Sept. 30, 2009 (after note repayment). However, including large amounts of special revenue and trust and agency funds in the state's common cash fund, the net available balance after note principal and interest payment totals $1.44 billion. This balance represents 2.0 times (x) coverage and about 3.4% of projected annual cash flow, an adequate margin. While there are risks to the state's cash flow forecast due to continued troubles in the automotive industry, the state has repeatedly demonstrated its willingness to implement mid-year expenditure reductions to maintain balances.
The state is borrowing $1.425 billion for operating purposes in the current fiscal year ending Sept. 30, 2009, a slightly higher amount than in past fiscal years and near the maximum allowed. The state resumed issuing operating notes in fiscal 2003 for the first time since fiscal 1998. With the depletion of balances, borrowing is necessary to help cover month-end cash deficits projected to reach nearly $2.1 billion during the months of June and July and just over $2.4 billion in August. Special revenue funds will be utilized and are projected to be sufficient to augment the notes in meeting cash flow requirements and to cover the year-end cash deficit that occurs after the notes are paid. Note issuance is limited to 15% of the prior year's undedicated revenues, which amount to only $10.1 billion, while all self-generated revenues were about $27.9 billion. After this note issue the state has very little additional note capacity within the 15% limit without appropriate legislation.
The state's finances have been pressured since its economic downturn began in 2001. While the state expects a modest surplus in fiscal 2008, which ended on Sept. 30, it continues to face major challenges due to the financial pressure faced by the automotive industry. Continued economic weakness and uncertainty threatens ongoing budgetary balance. Fitch expects the state will take appropriate actions to maintain balance should revenues be significantly weakened. For more information on Michigan's long term GO rating, please refer to Fitch's press release dated Oct. 17, 2008, available at www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, New York
Kenneth T. Weinstein, +1-212-908-0571
Richard J. Raphael, +1-212-908-0506
Cindy Stoller, +1-212-908-0526 (Media Relations)
cindy.stoller@fitchratings.com
