OREANDA-NEWS. Fitch Ratings affirms the following ratings on the bonds being assumed by the Great Lakes Water Authority, MI (GLWA) that were previously issued by the city of Detroit (the city) and the Michigan Finance Authority, MI on behalf of the Detroit Water and Sewerage Department (DWSD):

--$1.2 billion in senior lien water revenue bonds at 'BBB';
--$585 million in second lien water revenue bonds at 'BBB-';
--$1.8 billion in senior lien sewer revenue bonds at 'BBB';
--$698 million in second lien sewer revenue bonds at 'BBB-'.

The newly-created GLWA entered into 40-year leases of DWSD's respective water and sewer systems (except for the local city infrastructure) as well as a water and sewer services agreement with the city in June 2015. The leases are expected to become effective on Jan. 1, 2016 at which point GLWA will assume operational control of all leased assets of the respective water and sewer systems and will also assume all liabilities of the respective regional water and sewer systems and all outstanding indebtedness of the city related to the respective systems. Affirmation of the above ratings is a condition precedent to the leases becoming effective.

The Rating Outlook is Stable.

SECURITY

Senior lien water and sewer bonds are separately secured by a first lien on net revenues of each respective system. Second lien bonds are separately secured by a second lien on the net revenues of each respective system after payment of senior lien bonds.

KEY RATING DRIVERS

LEASE REINFORCES SEPARATE OPERATIONS: All system funds and accounts historically have been separate and distinct from other city funds including the city's general fund. The lease of the systems by GLWA provides further assurance that system operations will remain independent of the city.

ADEQUATE FINANCIALS ON OPERATIONAL IMPROVEMENT: Ongoing actions to date by DWSD have led to stabilized and improved financial results from prior years. Further gains are forecasted over the coming years.

HIGHLY LEVERAGED DEBT PROFILE: The systems' debt load is expected to remain elevated for the foreseeable future as a result of legacy issuances and ongoing borrowings. Over the longer term, it is envisioned by management a greater use of pay-go capital funding will alleviate debt pressures to some degree.

EXPANSIVE SERVICE TERRITORY: The systems provide essential services to a broad area. The water system covers almost 40% of Michigan's population, with over 75% of operating revenues coming from wealthier suburban customers. The sewer system includes around 30% of Michigan's population, with over 50% of operating revenues coming from suburban customers.

STRONG RATE-ADJUSTMENT HISTORY: The governing bodies have instituted virtually annual rate hikes in support of financial and capital needs. Continued annual adjustments are included in the forecast but the pace of growth should be less than in prior years.

RATING SENSITIVITIES

CONTINUED FINANCIAL AND OPERATING GAINS: Demonstration of consistent and steady improvement in the financial and operating profiles of the respective water and sewer systems could lead to upward rating movement over time.