Dec 13 (Reuters) - A recent ruling by a U.S. Bankruptcy Court judge that cleared the way for Detroit to borrow money for its broken public lighting system is bad for the city's bondholders, Moody's Investors Service said in a report released on Friday.
Judge Steven Rhodes, who is overseeing Detroit's historic bankruptcy case, gave the city the go-ahead on Dec. 6 for a financing plan that relies on $12.5 million in annual utility tax revenue and that begins with $60 million of short-term borrowing.
About 40 percent of the city's street lights do not work.
"The ruling is negative for Detroit's existing creditors as the proposed issuance increases the probability that future operating revenues will be diverted to new creditors, diminishing resources available to pay existing debt holders," the credit rating agency said.
It said the loss of utility tax revenue, which normally flows through Detroit's general fund, means that fund "may have fewer resources with which to pay creditors."
Because Rhodes' ruling found the agreements associated with the financing plan were the result of good-faith negotiations between the city, the Public Lighting Authority and the Michigan Finance Authority, a fight by bondholders over the utility tax revenue is not likely to be successful, Moody's said.
Kevyn Orr, Detroit's state-appointed emergency manager, is trying to improve services in the cash-strapped city.