S&P Perspectives On The State of The Municipal Market: Where We Have Been and Where We Are Heading

S&P Perspectives On The State Of The Municipal Market:
Where We Have Been And Where We Are Heading
Greg Carlin
Vice President Of Securities Evaluations, S&P Capital IQ
David Hitchcock
Senior Director Of U.S. Public Finance – State & Local Government, Standard & Poor‟s Ratings Services
Jane Ridley
Senior Director Of U.S. Public Finance – State & Local Government, Standard & Poor‟s Ratings Services
James Elder
Director Of Investment Management, S&P Capital IQ
December 12, 2013
Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.
Not for distribution to the public. Copyright © 2013 by Standard & Poor’s Financial Services LLC (S&P). All rights reserved.
S&P Perspectives On The State Of The Municipal Market
Where We Have Been And Where We Are Heading
• Opening remarks
– Director of Investment Management, S&P Capital IQ
• State of the market: Overview of a volatile year
– Greg Carlin, Vice President of Securities Evaluations, S&P Capital IQ
• Puerto Rico: Key rating factors, and factors that could change the rating or
rating outlook
– David Hitchcock, Senior Director of Public Finance – State & Local Government, Standard & Poor‟s
Ratings Services
• Detroit: Key rating factors, and the current status and impact of court cases
– Jane Ridley, Senior Director of Public Finance – State & Local Government, Standard & Poor‟s
Ratings Services
• Case study of Detroit‟s decline in health, with fundamental and market observations
– James Elder, Director of Investment Management, S&P Capital IQ
• Questions and answers
2 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
State Of The Market: Overview Of A Volatile Year
Greg Carlin
Vice President Of Securities Evaluations, S&P Capital IQ
Environment – Secondary Markets
• 2013 Highlights
– Detroit
– Puerto Rico
– Taper on/off
– Retail participation
– Dealer participation
• 2014 Discussion points

– Best execution
– Price transparency
– Retail versus Institutional
S&P Capital IQ’s analyses and valuations are not recommendations to make any investment decision, do not address the suitability of any security, and are not
determinations of the best execution price in the market for any security.
A Year Of Volatility
10-Year AAA Municipal 10-Year Treasury 30-Year AAA Municipal 30-Year Treasury
4.5
3.5
3
Yield
2.5
1.5
0.5
Source: S&P Capital IQ Securities Evaluations. Standard & Poor’s Securities Evaluations, a part of S&P Capital IQ. Data as of November 15, 2013.
Curve Structure
AAA Nov 2013 AA Nov 2013 AAA Jan 2013 AA Jan 2013
5.00
4.50
4.00
3.50
3.00
Yield
2.50
2.00
1.50
1.00
0.50
0.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Time to Maturity
Source: S&P Capital IQ Securities Evaluations. Standard & Poor’s Securities Evaluations, a part of S&P Capital IQ.
Best Execution
• Liquidity considerations
– Limited number of quotations in many situations
• Timeliness
– Deteriorating markets
• Comparable transactions
– Availability
– Process
• Independent evaluations
– Appropriate
– Defensible
S&P Capital IQ’s analyses and valuations are not recommendations to make any investment decision, do not address the suitability of any security, and are not
determinations of the best execution price in the market for any security.
Pre-Trade Price Transparency
• Questions
– What can be done to improve the transparency process?
– What methods of data aggregation are required?
– Who should be subject to contributing?
– Are there alternative data sets that would support the need?
– How to assure data quality?
– Timeliness?
• Concerns
– What technology will be utilized and what will be the cost?
– Will reporting be timely?
– What happens when data is duplicative or stale?
– Could pre-trade requirements impact liquidity?
Retail vs. Institutional
The Cost Of Retail Bond Buying
Investement Grade High Yield

3.00
2.75
2.50
2.25
2.00
Basis Points
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
Source: S&P Dow Jones Indices. Data as of Aug. 31, 2013. This table is provided for illustrative purposes. The S&P National AMT-Free Municipal Bond Index is
represented by “Investment Grade” while the S&P Municipal Bond High Yield Index is represented by “High Yield.”
Retail vs. Institutional
Akron, Bath and Copley Joint Hospital District (Children‟s Hospital) 5.00 due 11/15/2038
Evaluated Price Trade Price

103
102
101
100
Price
99
98
97
96
95
Source: S&P Capital IQ.
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punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if
advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold,
or sell any securities or to make any investment decisions. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a
substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P’s opinions and analyses do not
address the suitability of any security. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P
does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have
information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non–public information received in connection with each
analytical process.
S&P may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and
analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and
may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
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Puerto Rico:
Key Rating Factors, And Factors That
Could Change The Rating Or Rating Outlook
David Hitchcock
Senior Director, U.S. Public Finance, Standard & Poor‟s Rating Services
Puerto Rico GO And Sales Tax Ratings
• „BBB-/Negative‟ GO rating assigned March 13, 2013

• Outlook horizon is two years
• GO rating affirmed and new rationale and associated FAQ released
October 24, 2013
• Rating outlook on „AA-‟ first lien and „A+‟ second lien COFINA sales
tax supported debt changed to „negative‟ September 30, 2013
GO = General obligations. COFINA = Consejo de Financiación (Council on Finance)
GO Rating – Current Key Features
• Long history of structural deficits

• Economic contraction every year except one since 2006, when federal tax
breaks for offshore manufacturers phased out
• Current statistics indicate economic contraction may be continuing
• High debt and pension liabilities
GO Rating – Why Is It Still Investment Grade?
• Real budget adjustment efforts are being made

• Over $1 billion in new corporate tax increases – next year will see a higher full
year of collections
• Significant long term pension reform was enacted that improves long term
structural balance
• Liquidity is not an immediate concern in our opinion due to cash flow notes,
but debt will need to be refinanced and liquidity agreements renegotiated over
the next eight months
GO Rating – Why Is It Still Investment Grade?
• Water/sewer, electric, and highway authority rate, fee, and toll increases
designed to eliminate general fund subsidies
• Revenues and cash balances meeting earlier cash flow projections
through October
• Access to GDB for temporary liquidity
• Administration‟s stated intention to lower the deficit in fiscal 2015, and to
have structural balance in 2016
What Could Lead To A Lower GO Rating?
Potential Factors Could Include:
• Deficit larger than the 8% budgeted for fiscal 2014

• No significant deficit reduction in fiscal 2015, or we view structural balance
unlikely in 2016
• Economic contraction becomes so large we judge deficit closing is
not achievable
• Extended loss of market access – either through COFINA or otherwise
• A liquidity crisis
Additional GO FAQ
• Liquidity
• Market access
• Swap termination and other contingent risks
• Bankruptcy
• GO “clawback” for PRASA and PREPA
• General Fund lease appropriation secured debt
PRASA = Puerto Rico Aqueduct and Sewer Authority. PREPA = Puerto Rico Electric Power Authority.
COFINA
• Strong annual debt service coverage in early years

• Recent expansion of sales and use tax base
• 25% of island income consists of federal transfer payments –
a stabilizing factor
• No GO “clawback”
• Very long maturities will need a modest level of sales tax growth to meet debt
service coverage
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S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P
Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for
the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL
EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM
BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE
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losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating
acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P
assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its
management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P
has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw
or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as
any liability for any damage alleged to have been suffered on account thereof.
information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each
analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's
public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed
through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
20 Permission
STANDARD & POOR’S, to reprint
S&P, GLOBAL or distribute
CREDIT PORTAL anyand
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RATINGSDIRECT requirestrademarks
are registered the prior written approval
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& Poor’s Capital IQ. Not forLLC.
Services distribution to the public.
Detroit:
Key Ratings Factors And Chapter 9 Bankruptcy Filing
Jane Ridley
Senior Director, U.S. Public Finance, Standard & Poor‟s Rating Services
Recent Rating Actions: GO
• October 2, 2013: „D‟/NM

– Following non-payment of debt service by the city on all limited- and unlimited-tax
GO bonds
• July 18, 2013: „C‟/negative

– After bankruptcy was filed
– „C‟ rating consistent with S&P‟s criteria for an entity that has filed
• June 18, 2013: „CC‟/negative

– Reflected the possibility of defaults on GOs
– The rating on the Pension Obligation Certificates was moved to D
• June 12, 2013: „CCC-‟/negative

– Followed announcement of Creditor presentation to be held June 14
– Indicated there could be a renegotiation of bond terms within six months
– A renegotiation is considered a selective default
Source: www.standardandpoors.com/detroit9.
History Of GO Rating
GO Bond Rating
Rating Date Rating Outlook
October 2, 2013 D NM
July 18, 2013 C Negative
June 18, 2013 CC Negative
June 12, 2013 CCC- Negative
March 15, 2013 B Stable
March 27, 2012 B Negative
January 7, 2009 BB Stable
December 20, 2007 BBB Stable
November 21, 2005 BBB Negative
March 23, 2005 BBB+ Stable
March 29, 1999 A- Stable
Water And Sewer Revenue Bond Update
• Next payment on revenue debt is January 1, 2014

– Debt service deposited monthly to P&I account
– Will likely pay on January 1 as scheduled
• 2014 rate increases: Effective July 1 (on time)

• Currently on CreditWatch Negative
– BB-/CWNeg affirmed October 11, 2013
– CWNeg could be revised following bankruptcy court decisions that impact the payment of
debt, either positively or negatively
• FY 2013 audit is pending
Distributable State Aid (DSA) Bonds
• Rated AA/AA-/A+ on 1st (closed), 2nd and 3rd liens

– Outlook changed to CreditWatch Negative on July 18 to reflect possibility of restructuring
in bankruptcy. CWN affirmed November 5
• The intercept structure provides additional security for bond holders

– Created through an agreement between the city, the state and the trustee to deposit
distributable state aid
• Should the holders of the bonds accept renegotiated terms, we would

consider it a selective default
Selective Default/Distressed Exchange
• Selective Default: Bonds not paid on time and in full

– Based on original payment terms
• Distressed exchange: Payment haircuts or other adjustments to original

payment terms
– Even if terms are agreed to by both parties
• Applies to any bonds that may be renegotiated, even if they eventually are
not renegotiated
– DSA and Water/Sewer: Denote the possibility with CreditWatch Negative
Chapter 9 Bankruptcy
• High hurdle
– Must be in a state that allows plus prove insolvency, among other conditions
• Detroit is in the first phases of a long process

• In our view, the stigma sticks, especially in the credit markets
• We don‟t expect this will become a way for troubled munis to solve
their problems
„Secured‟ vs. „Unsecured‟ GO Debt
• The EM‟s creditor proposal suggests differentiation

– EM and Governor continue making statements perpetuating the concept
• Determination to be made by bankruptcy court

• S&P will continue to monitor any bankruptcy rulings which could have
wide implications
– Any action by S&P Ratings would be after a clear precedent
– Depending on any ruling, could be state-specific or have wider implications
Impact Of Bankruptcy Filing On Municipal Credit Quality
• S&P Ratings does not view Detroit‟s filing as the continuation of a trend
– S&P February 2012: “Anticipate pockets of credit degradation as well as instances of
outright credit distress”
– Detroit‟s rating history clearly indicates downward trajectory
• Will continue to monitor any precedents set

– No other rating actions taken or credits placed under review as a result of the creditor
proposal or bankruptcy filing
• Could have an impact on other ratings in the region
Bankruptcy Eligibility Ruling
• Bankruptcy court announced on Tuesday, December 3 that Detroit is eligible

for bankruptcy protection
• Does not impact our ratings on the GO, DSA or revenue bonds
Bankruptcy: A Long And Costly Process
• Plan of adjustment is the first step

• News reports indicate have already spent $19 million in legal and
consulting fees
• Even if the plan is filed by the end of the month, still expect the process
to take time
Bankruptcy Going Forward: What‟s Next?
• Lots of questions about precedents

– Bankruptcy court makes rulings for a geographic jurisdiction
– Will rulings by the Detroit bankruptcy court be followed by other bankruptcy courts?
Will they be reviewed by a higher court?
– No nationwide conclusions
• Eager to hear what kinds of treatment bonds get in the negotiation process
– May have gotten a preview on the treatment of pensions
• “The End of the Beginning”

– Expect it to be a long process
– 14 months may be a bit aggressive, especially given how long some others have taken
Looking Ahead: Detroit Ratings
• GOs: „D‟/NM
• DSA bonds: rating will likely change if we have clear indication of
renegotiation, or lack thereof
– Water and Sewer: Rating could change following any applicable bankruptcy
court decisions
• Cannot project what will happen in bankruptcy court, even speculation

is difficult
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Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved.
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered,
reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively,
S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P
Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for
the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL
EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM
BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE
CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or
losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating
acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P
assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its
management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P
has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw
or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as
any liability for any damage alleged to have been suffered on account thereof.
information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each
analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's
public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed
through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
34 Permission
STANDARD & POOR’S, to reprint
S&P, GLOBAL or distribute
CREDIT PORTAL anyand
content from this presentation
RATINGSDIRECT requirestrademarks
are registered the prior written approval
of Standard of S&PFinancial
& Poor’s Capital IQ. Not forLLC.
Services distribution to the public.
Case Study:
Detroit‟s Decline In Health, With
Fundamental And Market Observations
James Elder
Director Of Investment Management, S&P Capital IQ
S&P/Case-Shiller Indices – Past Five Years
Detroit Languished For Years But Has Shown A Recent Resurgence
S&P Case-Shiller MI-Detroit S&P Case-Shiller Composite-20

120%
110%
100%
90%
80%
70%
60%
Source: S&P Dow Jones Indices accessed via Global Credit Portal as of November 27, 2013.
S&P/Experian Consumer Credit Indices – Past Five Years
Michigan Largely Followed National Trends
Companies Headquartered In Detroit
Financial Analysis Of Companies Shows Slow Steady Results
Five Year Average vs. Median CreditModel (CM) Score History
Average CM Score Median CM Score
aaa
aa
19
a
16
bbb
13
Slowed Improvement
bb
10
b7
cc4
c
cc
c1
Source: S&P Capital IQ. Lowercase nomenclature is used to differentiate CreditModel scores from credit ratings issued by Standard & Poor’s Rating Services.
For illustrative purposes only.
Companies Headquartered In Detroit
Market Views Of Corporate Risk Show Recent Weakness
Average PD
Average Probability of Default (PD) vs. PD Score Average PD Score (Right)
25% aaa
Average PD Detroit Average PD U.S.
5%
aa
19
4%
4%
20% 3%
3% 16
a
2%
2%
1%
15% 1% 13
bbb
0%
11/28/2012 1/28/2013 3/28/2013 5/28/2013 7/28/2013 9/28/2013
10
bb
10%
7b
Stalled Improvement
5%
4ccc
cc
0% 1c
Source: S&P Capital IQ. Lowercase nomenclature is used to differentiate Probability of Default and PD scores from credit ratings issued by Standard & Poor’s Rating
Services. For illustrative purposes only.
Municipal Index Performance – Feb. 2010 - Present
S&P Municipal Bond Michigan Outperforms By 147bps,
But Underperforms Last Six Months By 51bps
S&P Municipal Bond S&P Municipal Bond Michigan
130%
125%
120%
115%
110%
Municipal Index Performance - Last Six Months
S&P Municipal Bond S&P Municipal Bond Michigan
105% 100%
100% 98%
95% 96%
June 19, 2013 – Bernanke

90%
statements on potential 94%
tapering
85%
92%
5/28/2013 6/28/2013 7/28/2013 8/28/2013 9/28/2013 10/28/2013
80%
Detroit Yields Spike
City Of Detroit Debt Without Insurance Wrap
Yield (%) Average Price Median Price

14
July 18, 2013 –
Detroit Files for
Chapter 9
12
Bankruptcy
Protection
10
July 5, 2013 – Surprisingly

2 good unemployment report,
Treasury yields rise
Source: Standard & Poor’s Securities Evaluations, a part of S&P Capital IQ, as of November 27, 2013 accessed via S&P CapitalIQ Excel Plug-in.
Municipal Credit Analysis – Challenges And Approaches
• Challenges in the municipal space

– Increased scrutiny of Municipal Credits due to reduction in monoline-insured securities
– Greater internal due diligence for municipal exposure to supplement credit agency ratings
– Increased demand for timely, accurate financial data and consistent internal
analytic methods
– Difficult to model creditworthiness assessing low-default sectors
• An independent approach to municipal credit scoring

– Based on S&P Ratings Services criteria, however
– S&P Capital IQ‟s is a distinct credit scoring approach in which users enter their
own figures and qualitative overlay(s), providing separate and distinct insights from
S&P Ratings Services
– This exercise is facilitated through independent, custom analytic scorecards encapsulating
accepted methodologies but employing user data and judgment
Stand-Alone Analytical Framework For Credit Scoring
Local And Regional Government Scorecard
Economic Base
Business
Management Risk
Stand-Alone
Credit Score
Budgetary
Performance
and Flexibility
Financial
Financial Position Risk
and Debt Burden
S&P Ratings Analysts‟ Adjusted Statistics And Fundamentals
RatingsDirect On The Global Credit Portal®
Source: Global Credit Portal as of November 26, 2013.
Step 1: Score Economic Base – As Of December 31, 2012
Structure And Characteristics Of The Economic And Employment Base
Commercial Industrial Personal Residential Unemployment Rate (Right)
• Significant declines $12,000,000 30%
in assessed value of
$10,000,000 25%
property alongside
(Thousands)
$8,000,000 20%
severe unemployment
$6,000,000 15%
that is well above
$4,000,000 10%
national and state
levels $2,000,000 5%
$0 0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Fiscal Year
Evaluation
Internal
Category Ratio Value (1-10)
Score
10 = Worst
Economic Base 3.23

Demographics 9.0 0.45
Population 713,777 1.0 0.06
Economic Structure
Per Capita Income as % US Level (%) 34.8 7.5 1.13
Top 10 Taxpayers (%) 20.2 4.0 0.22
Unemployment 10.0 0.30
Source: Detroit Fiscal 2012 CAFR. Global Credit Portal as of November 26, 2013. IHS Global Insight as of November 25, 2013.
Step 2: Score Management – As Of December 31, 2012
Managerial Decisions, Policies, And Practices
• The rigor of a government's financial management practices is an important

factor in S&P Ratings Services‟ analysis of a government's creditworthiness
• Rising unemployment, declining real estate rate and reduced property values
have placed fiscal constraint on the city‟s budget
• Detroit‟s pension obligations, retiree benefits, and debt service present a
substantial financial challenge for the city
Evaluation
Internal
Category Ratio Value (1-10)
Score
10 = Worst
Management 0.80
Management Systems & Policy

Budgetary Performance 8.0 0.56
Step 3: Financial Risk – As Of December 31, 2012
Budgetary Performance/Flexibility And Financial Position/Debt Burden
• Detroit‟s budgetary performance measured by the Unassigned Fund Balance

Ratio is very weak (score =10)
Unassigned Fund Balance
Unassigned Fund Balance Ratio = x 100
General Fund Revenues + Net Transfers
-326,642,557
Unassigned Fund Balance Ratio = x 100 = -37.3
1,102,251,571 - 227,506,929
Evaluation
Category Ratio Value (1-10) Score
10 = Worst
Budgetary Performance & Flexibility 1.74
Revenue Diversity
Revenue Composition 7.0 0.32
Budgetary Performance & Financing Requirements
Unassigned Fund Balance Ratio -37.3 10.0 0.70
Financial Position and Debt Burden 1.54
Liquidity & Debt Management 8.0 0.48

Overall Net Debt Per Capita ($) 11,956.3 6.5 0.26
Source: Global Credit Portal as of November 26, 2013.
Detroit, MI Summary Scoring – As Of December 31, 2012
Fiscal Year Ending June 31, 2012
• Accounting for quantitative and qualitative factors we are able to

arrive at an independent assessment of the credit risk of Detroit
• We follow a robust methodology but there is ample room for
analyst adjustment
Evaluation
Local and Regional Independent
(0-10) Score
Government Rating Score
10 = Worst
Economic Base 6.6 3.23 bb
Management 8.0 0.80 b
Budgetary Performance & Flexibility 8.9 1.74 b-
Financial Position and Debt Burden 7.0 1.54 bb-
Total Score of Factors 7.3 bb-
Analyst Adjustment 1.0
Final Assessment 8.3 b
Key Observations
• Housing is on an improving path, but still very depressed

• Michigan Municipal Bond Benchmark lags the U.S. over the past six months
• Yields have not recovered
• Access to standardized financials and custom scoring exposures can
facilitate scenario analysis and stress testing
Q&A
Greg Carlin James Elder David Hitchcock Jane Hudson Ridley

S&P Capital IQ S&P Capital IQ Senior & Poor‟s Standard & Poor‟s
Ratings Services Ratings Services
Speaker Biographies
Greg Carlin, Vice President of Securities Evaluations, S&P Capital IQ
Greg is responsible for the Product Management team focused on the fixed income mark–to‐market needs of industry participants. In this role, Greg has general manager
responsibilities for all the business and product development activities of the business unit. Greg has over twenty‐five years experience in the fixed income market,
functioning in a number of capacities throughout his career. His experience includes ten years in a securities pricing role, where he managed the development of a
proprietary evaluation system for the pricing of over 3 million taxable and tax‐exempt securities. Prior to his current role Greg spent seven years in a business development
capacity focused on the development of solutions across all credit market needs. Greg holds a B.S. in Finance from The University of Scranton and an MBA in Real Estate
Investment from Rutgers, The State University of New Jersey. He is active in many industry groups and currently serves on the Executive Committee of The Software &
Information Association‟s Financial Information Services Division.
James Elder, Director of Investment Management, S&P Capital IQ

Jim‟s current responsibilities involve development of strategic solutions for the market. Jim focuses on the asset management community through the publication of
research relative to buy-side professionals, the development of analytic methodologies and the application of innovative solutions to market problems. Jim‟s ten years of
industry experience include positions in asset management, financial guaranty and structured finance. He has worked at J.P. Morgan and XL Capital Assurance. Jim joined
Standard & Poor‟s in 2007. Jim holds an M.B.A in finance from New York University‟s Stern School of Management. Jim graduated with bachelor degrees in Computer
Science and Management from Rensselaer Polytechnic Institute.
David Hitchcock, Senior Director of Public Finance – State & Local Government, Standard & Poor‟s Ratings Services
David has worked at Standard and Poor's for 33 years. He currently is a involved in state rating and rating committees, and serving in particular as primary analyst for the
states of New York, Michigan, Arizona, Colorado, Idaho, New Mexico, Kansas, Wyoming, and the Commonwealth of Puerto Rico, as well as back up analyst for California,
Massachusetts, Connecticut and many other states. Previously he was in Standard and Poor‟s State and Local Government Group, and was sector leader at various times
for pension and OPEB issues, charter schools, special tax and special district bonds, as well as working directly on various major state and local credits, including general
obligation, special tax, special district, lottery, and municipal utility bonds. Before moving to the State and Local Government Group at Standard and Poor‟s, Mr. Hitchcock
worked in Standard and Poor‟s Special Revenue group coordinating at various times ratings for higher education, toll roads and airports, municipal industrial bond pools,
sales taxes, foundations, student loan revenue bonds, and various types of enterprise systems. Prior to S&P, Mr. Hitchcock held an associate's position in E.F. Hutton &
Co.'s municipal bond research department. He is a past chairman of the Municipal Analysts Group of New York, and has served on the board of the National Federation of
Municipal Analysts, which gave him a meritorious service award in 2002. He also has served previously on the U.S. Comptroller General‟s Advisory Council on Government
Auditing Standards. He has also been a recipient in numerous years of Smith‟s Research and Ratings Review‟s analyst all-star team awards. Mr. Hitchcock has spoken at
many conferences and written numerous articles for Standard and Poor‟s and outside publications, including guest contributions to the Bond Buyer, City and State
magazine, and Governing magazine. Mr. Hitchcock received a BA degree with a major in Physics from Williams College, Williamstown, MA in 1978.
Jane Hudson Ridley, Senior Director of Public Finance – State & Local Government, Standard & Poor‟s Ratings Services
Jane serves as the analytic manager and team leader for the State and Local Government department‟s Great Lakes group. Her 25-member team covers local issuers in
13 states across the Midwest. She has been with Standard & Poor‟s since 2001. During her tenure at Standard & Poor‟s, Jane has worked with issuers throughout the
region, serving as the primary analyst for the states of Michigan and Minnesota, and also major cities in the region including Detroit and Minneapolis. Her areas of expertise
also include charter schools and Standard & Poor‟s Financial Management Assessment scoring tool. Before joining Standard & Poor‟s, Jane was a Vice President in the
Municipal Securities Group at Banc of America Securities, and an analyst at PaineWebber. Jane served as a board member of Women in Public Finance, and has also
been very active in the Chicago Summer Business Institute, a summer program designed to give Chicago high school students the opportunity to work in the financial
services sector. She is a member of the National Federation of Municipal Analysts and its local affiliate the Chicago Municipal Analyst Society. Jane is a graduate of
Northwestern University.
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S&P Perspectives On The State of The Municipal Market: Where We Have Been and Where We Are Heading

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S&P Perspectives On The State of The Municipal Market: Where We Have Been and Where We Are Heading

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S&P Perspectives On The State Of The Municipal Market:

Where We Have Been And Where We Are Heading

December 12, 2013

• 2014 Discussion points

Investement Grade High Yield

Evaluated Price Trade Price

Source: S&P Capital IQ.

• „BBB-/Negative‟ GO rating assigned March 13, 2013

GO = General obligations. COFINA = Consejo de Financiación (Council on Finance)

• Long history of structural deficits

• Real budget adjustment efforts are being made

• Deficit larger than the 8% budgeted for fiscal 2014

• Strong annual debt service coverage in early years

• October 2, 2013: „D‟/NM

• July 18, 2013: „C‟/negative

• June 18, 2013: „CC‟/negative

• June 12, 2013: „CCC-‟/negative

July 18, 2013 C Negative

June 18, 2013 CC Negative

June 12, 2013 CCC- Negative

March 15, 2013 B Stable

March 27, 2012 B Negative

January 7, 2009 BB Stable

December 20, 2007 BBB Stable

November 21, 2005 BBB Negative

March 23, 2005 BBB+ Stable

March 29, 1999 A- Stable

• Next payment on revenue debt is January 1, 2014

• 2014 rate increases: Effective July 1 (on time)

• FY 2013 audit is pending

• Rated AA/AA-/A+ on 1st (closed), 2nd and 3rd liens

• The intercept structure provides additional security for bond holders

• Should the holders of the bonds accept renegotiated terms, we would

• Selective Default: Bonds not paid on time and in full

• Distressed exchange: Payment haircuts or other adjustments to original

• Detroit is in the first phases of a long process

• The EM‟s creditor proposal suggests differentiation

• Determination to be made by bankruptcy court

• Will continue to monitor any precedents set

• Could have an impact on other ratings in the region

• Bankruptcy court announced on Tuesday, December 3 that Detroit is eligible

• Plan of adjustment is the first step

• Lots of questions about precedents

• “The End of the Beginning”

• Cannot project what will happen in bankruptcy court, even speculation

S&P Case-Shiller MI-Detroit S&P Case-Shiller Composite-20

June 19, 2013 – Bernanke

Yield (%) Average Price Median Price

July 5, 2013 – Surprisingly

• Challenges in the municipal space

• An independent approach to municipal credit scoring

Source: Global Credit Portal as of November 26, 2013.

Economic Base 3.23

• The rigor of a government's financial management practices is an important

Management Systems & Policy

• Detroit‟s budgetary performance measured by the Unassigned Fund Balance

Budgetary Performance & Flexibility 1.74

Financial Position and Debt Burden 1.54

Liquidity & Debt Management 8.0 0.48

Source: Global Credit Portal as of November 26, 2013.

• Accounting for quantitative and qualitative factors we are able to

Economic Base 6.6 3.23 bb

Management 8.0 0.80 b