OREANDA-NEWS. Fitch Ratings assigns an 'AA' rating for the following Michigan Finance Authority (MFA)bonds:

--\$197,353,000 local government loan program revenue bonds series 2015A (school district of the city of Detroit state qualified unlimited tax general obligation local project bonds).

The bonds are expected to sell via negotiated sale during the week of Feb. 9, 2015.

In addition, Fitch affirms the ratings on the following at 'AA':

--Michigan School Bond Qualification and Loan Program (SBQLP) program rating.

The Rating Outlook is Stable.

SECURITY

The rating reflects the state treasurer's statutory obligation to promptly pay debt service from state funds in the event that funds deposited by school districts for qualified bonds are insufficient to fully cover principal and interest when due.

KEY RATING DRIVERS

RATING BASED ON STATE CREDIT QUALITY: The ratings for the SBQLP program bonds, including the new bonds to be issued by the MFA, a state authority chaired by the state treasurer, on behalf of the School District of the City of Detroit, are based solely on the credit quality of the state of Michigan, whose GO bonds are rated 'AA' by Fitch. The rating does not reflect the underlying credit quality of the school district ultimately using borrowed proceeds because of the state's obligation to pay debt service as needed.

CONSTITUTIONAL AUTHORIZATION: Michigan's constitution and statutory requirements provide that, in the event that funds deposited by school districts for debt service on qualified bonds are insufficient, the state's treasurer will promptly pay principal and interest when due.

RATING SENSITIVITIES

CHANGES IN STATE CREDIT QUALITY: The ratings are sensitive to changes in the state of Michigan's GO bond rating, to which the ratings are linked.

CHANGE IN STATE COMMITMENT TO SUPPORT BONDS: The ratings are also sensitive to any statutory change to the enhancement program that weakens the state's commitment to school district debt.

CREDIT PROFILE

The 'AA' ratings on the SBQLP, including on the series 2015A bonds to be issued by MFA on behalf of the School District of the City of Detroit, reflect Michigan's constitutional and statutory requirements to promptly pay the trustee in the event that borrowing school districts are otherwise unable to make full principal and interest payments when due on their qualified bonds for any reason. The rating thus only reflects the credit quality of the state, rather than the credit quality of the borrowing school district.

Michigan has authority to issue GO bonds and/or notes to provide enhancement to local school district debt under the long-established SBQLP, and state constitutional language prohibits impairment of bondholder rights. The state treasurer's obligation to pay the trustee is conditioned solely on the event of inadequate funds to cover principal and interest on qualified bonds, independent of any action by the borrowing district. Separately, the statute provides mechanics for the school district to repay the state, but the state's obligation is not conditional on this reimbursement.

The School District of the City of Detroit, which is legally separate from the City of Detroit, will use new bond proceeds to refund existing qualified school debt. The intended source of bond repayment is debt service payments made by the school district on its own underlying GO unlimited tax bonds, the repayment of which is pledged to the MFA bonds.

The school district is currently under an emergency manager and a future bankruptcy filing under Chapter 9 of the U.S. bankruptcy code cannot be ruled out. In Fitch's view, the constitutional and statutory language requiring the state treasurer to promptly and directly address any deficiency in principal and interest creates a direct obligation of the state to bondholders, separate from the district's financial condition or status in bankruptcy; however, no bond counsel opinion was furnished affirming Fitch's assessment. The program is a longstanding and widely-used mechanism for school districts in Michigan to enhance their own GO unlimited tax bonds. A challenge to the state's unconditional statutory obligation in the context of Chapter 9 would impair the state's ability to meet its constitutional mandate.

The qualification process for school district debt is comprehensive, requiring a review by the state treasurer that covers the scope of the project and its estimated costs, the total bonded debt of the borrowing district, the estimated mill rate required to pay the debt, information regarding enrollment projections, and evidence that the additional debt will not preclude repayment of outstanding qualified loans. Outstanding bonds totaled more than \$13.1 billion as of Dec. 31, 2013.

If for whatever reason a qualified district fails to make full principal and interest payments when due, state statute requires the state treasurer to loan sufficient funds to the district no later than three days prior to debt service payment to ensure full and timely debt service. Any loan taken by a school district must be repaid, with the mill levy remaining in place following bond repayment.

Michigan's GO bond rating, at 'AA,' reflects its solid economic and fiscal recovery over the last several years. After a decade of persistent economic weakness, the result of manufacturing cyclicality and the near-collapse of the domestic auto sector, the state's economy is growing again, albeit slowly, and structural changes in the automotive sector have improved its longer-term viability. Fitch assumes that Michigan's manufacturing sector will remain a sizable and cyclical component of the state's economy.