OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating for the following Public Lighting Authority of Detroit (PLA), Michigan bonds issued by the Michigan Finance Authority (MFA):

--\$184.96 million local government loan program revenue bonds, series 2014B.

The Rating Outlook is Stable.

SECURITY
Ultimate security is provided by a first lien on revenue from the 5% tax assessed on electric, gas and local telephone utility services within the city of Detroit.

KEY RATING DRIVERS

LEGAL SEPARATION OF REVENUES FROM DETROIT: The 'BBB+' rating reflects Fitch's belief that the pledged revenues required for debt service belong to the PLA and are therefore not at risk of being considered property of the city of Detroit (the city).

DECLINING REVENUE STREAM: Utility user tax (UUT) receipts exhibit significant levels of volatility, declining an aggregate 26.5% over the past 10 years. Fitch believes the revenue stream is at risk of further declines given the underlying price volatility of the utility services being provided.

NARROWING BUT SUFFICIENT MADS COVERAGE: Fiscal 2014 (unaudited) revenues provide 3.4x coverage of maximum annual debt service (MADS) (2016). Fitch believes coverage will narrow, but should remain adequate because of the low, essentially fixed leverage and essential nature of the services being taxed.

ADEQUATE LEGAL STRUCTURE: The governing statutes and legal documents provide solid bondholder protections, a perfected first lien on pledged revenues, an additional bonds test that effectively prevents additional leverage affecting these bonds, a non-impairment covenant and a fully cash funded debt service reserve sized at MADS.

RATING SENSITIVITIES
MATERIAL COLLECTION TREND CHANGE: Utility tax collection trends that materially depart from Fitch's expectations could result in a change to the Public Lighting Authority's rating.

CREDIT PROFILE
The PLA was created in 2013, pursuant to a 2012 statute, to manage and maintain Detroit's public lighting system. State statutes authorize the borrowing and provide for the perfected first lien on pledged revenues. The PLA is authorized to sell bonds to the MFA in order to fund necessary capital improvements to the system. The city began levying and collecting the UUT in 1970. The taxes have been remitted directly to a revenue trustee since August of 2013, with \$12.5 million annually being paid to the PLA and the residual paid to the city.

REVENUES NOT CITY PROPERTY

The bankruptcy court overseeing the city's Chapter 9 proceeding issued an order that stated the pledged revenues 'do not constitute property of the [city], and the [city] has no right, claim or interest in or right to interfere with, control, or deal with in any manner the [Tax] Revenues irrevocably transferred, or that will be transferred, to the Trustee.'

Bond counsel further opined that in the recent bankruptcy and in the case of a subsequent city bankruptcy, 'though the matter is not free from doubt, we are of the reasoned opinion that, in a properly argued case, a court would find that the Tax Revenues are held in trust and, except to the extent of any residual beneficial interest under the Trust Agreement, are not property of the city.' Fitch's belief that this would hold true is based on independent legal review and analysis and is the key assumption supporting the 'BBB+' rating.

SOLID BONDHOLDER PROTECTIONS

Bondholders are afforded solid protections under various state statutes, including Acts 100, 392 and 393, and the trust agreement. Chief among these is the perfected first lien on pledged revenues. Bondholders also benefit from a debt service reserve, sized at MADS, fully cash-funded with bond proceeds. Non-impairment covenants in state statute prohibit the city from lowering the tax below the currently levied 5% while PLA bonds are outstanding. The rate may not be increased without state legislative authority.

The maximum amount of UUT that is dedicated to the PLA is \$12.5 million, which serves as the additional bonds test limit for MADS. The bonds are structured with annual debt service (ADS) of \$12 million declining to \$11.7 million over the life of the bonds, and no further parity borrowing is anticipated.

The flow of funds directs UUTs collected by the utilities to be remitted directly to the revenue trustee who makes a monthly deposit equal to 1/12th of \$12.5 million to the PLA bond trustee. Residual amounts in excess of 1/12th of \$12.5 million are remitted to the city.

DECLINING REVENUES, COVERAGE

Fiscal 2013 UUT collections were sufficient to provide 3.1x MADS. Revenues ticked up slightly in fiscal 2014 (unaudited), providing a slightly stronger 3.4x MADS, but more recent year-to-date figures suggest a modest decline. Fitch believes UUT will fully cover debt service through bond maturity, but that coverage will narrow over time, given historical volatility patterns. Although the authority's fiscal 2014 financial statements are audited, the UUT collection detail will not be considered audited until the city's audit is finalized.

UUT declined at a compound annual rate of 2.1% over the past 10 years, which included several years of extraordinary gas-price volatility and population losses. Should revenues continue to decline at that pace, debt service coverage would decline to 1.9x by 2042 and remain at that level through maturity in 2044. Fitch stress testing shows that the UUT revenue stream could withstand annual declines of 4% while still maintaining at least sum sufficient coverage. Revenues could withstand a 5.2% annual decline, if debt service reserve draws are included.