Fitch Takes Various Actions on Pontiac, Michigan Bonds; Watch Negative.

NEW YORK -- Fitch Ratings has taken the following rating actions on securities issued by the Pontiac, MI General Building Authority (GBA) and its related Tax Increment Finance Authority (TIFA):

Pontiac TIFA (Development Area No. 3)

--$4.4 million tax increment revenue bonds, series 2002 (2002 TIFA No. 3 bonds) downgraded to 'CCC' from 'B'; remains on Rating Watch Negative.

Pontiac GBA

--$900,000 limited tax general obligation (LTGO) bonds, series 2002 (2002 GBA LTGO bonds) affirmed at 'CCC'; remains on Rating Watch Negative.

Pontiac TIFA (Development Area No. 2):

--$3.9 million tax increment revenue and refunding bonds, series 2002 (2002 TIFA No. 2 bonds) affirmed at 'CCC'; remains on Rating Watch Negative.

The Negative Watch for all three credits is tied to the likely acceleration of near-term tax base declines, primarily due to General Motors' (GM) recent appeal of 80% of its property assessments nationwide, and the announcement of the closure of a truck assembly plant within TIFA Area No. 2. In addition, the city is attempting to achieve substantial labor concessions in order to balance its fiscal 2010 budget. Failure to reach agreement, or otherwise achieve significant recurring budgetary reductions, could leave the city even more vulnerable to declines in tax revenues. The ratings also reflect that TIFA No. 2 and No. 3 tax increment revenues are paying debt service on the 2002 GBA LTGO bonds and various other bonds, on a parity basis with the 2002 TIFA No. 2 and No. 3 bonds.

In March 2009, the governor declared a local fiscal emergency and appointed an emergency fiscal manager (EFM). The EFM has broad operational and financial authority over the city, including the ability to control budgeting and expenditures, consolidate or reorganize city departments, and negotiate collective bargaining agreements. Fitch notes that the quality of disclosure has improved with the EFM's appointment.

The downgrade of Pontiac's 2002 TIFA No. 3 bonds reflects the accelerating decline in the captured tax base, and the likelihood of further declines as the city's housing market continues to weaken. While audited fiscal 2008 tax revenues and investment income provided a satisfactory 1.3 times (x) coverage of maximum annual debt service (MADS, occurring in 2023), coverage is weakening. TIFA No. 3's captured value for 2010 declined 12.3%, to $114.6 million, from 2009 levels. Fitch expects the declines to continue for several more years, reflecting the high proportion of residential properties in TIFA No. 3 (42% of the fiscal 2007 tax base), and pressuring the ability to meet various parity debt service obligations. LoanPerformance data for the entire city as of the first quarter of 2009 indicates nearly twice the national exposure to subprime loans (48.6% vs. 24.9%), and a foreclosure rate of 15.1% (versus 12.2% nationally).

The rating on the 2002 GBA LTGO bonds reflects the city's extremely stressed economic profile and precarious financial position. Unemployment is one-third of the city's labor force (33.2% in June 2009), and conditions could worsen with the official closing of a GM truck assembly plant later this fall. The FY 2010 general fund budget, while balanced, relies on $8 million (nearly 20% of the budget) in labor concessions and asset sales that are not yet finalized. Fitch expects further budgetary challenges in fiscal 2011 as the city continues to absorb the impacts of GM's restructuring.

The rating on the 2002 TIFA No. 2 bonds reflects the significant exposure to GM, and a sharp decline of 15.2% in captured value for the current fiscal year. Audited fiscal 2008 tax revenues and investment income provided a sound 1.7x coverage of MADS (occurring in 2011), but coverage will weaken considerably in 2010 and beyond. Further reductions in GM's assessments, nearly one-third of 2010 captured value, are likely over the next one to two years, pressuring TIFA No. 2's ability to meet its various parity debt service obligations. Partially offsetting this significant concern, debt service declines notably in 2010 to $2.6 million from $3.6 million in 2009, and remains relatively stable through 2017 when it declines further until final maturity in 2027.

Located 31 miles from Detroit in Oakland County, Michigan, Pontiac's debt levels are moderately high with direct debt equal to $1,253 per capita, or 2.3% of 2010 market value. These ratios include all tax-supported debt of the city secured with city's LTGO pledge or the city's share of Distributable State Aid, but currently paid by TIFA No. 2.

For additional information, please see the following report, available on Fitch's web site at 'www.fitchratings.com':

--'Fitch Takes Various Rating Actions on Pontiac, Michigan', Jan. 29, 2009.

An error was found in the rating on Fitch's web site for the bonds listed below:

--Pontiac Tax Increment Finance Authority (MI) tax increment revenue and refunding bonds (Development Area No. 2) series 2002;

--Pontiac Tax Increment Finance Authority (MI) tax increment revenue bonds (Development Area No. 3) series 2002.

The ratings for the above bonds were entered in Fitch's database under the issuers Pontiac Tax Increment Finance Authority No. 2 and No. 3, respectively. The bonds were in fact issued by a single Pontiac Tax Increment Finance Authority. The issuer and bonds now appear correctly on Fitch's web site 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.