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Rating Action:

Moody's confirms Chicago's second lien water revenue at Baa2; outlook stable

07 Aug 2019

New York, August 07, 2019 -- Moody's Investors Service has confirmed the Baa2 rating on the City of Chicago's second lien water revenue bonds, affecting $1.2 billion of rated debt. The city does not have any senior lien water revenue debt outstanding following a recent defeasance. This action concludes a review for possible downgrade undertaken on May 13, 2019. The outlook is stable.

RATINGS RATIONALE

The confirmation of the second lien water revenue rating at Baa2 reflects the city's recent defeasance of all senior lien water revenue debt, giving the second lien a priority claim on water net revenues. Although the senior lien is not closed, officials have publicly indicated there are no plans to issue debt under the open senior lien.

A second factor that led to confirmation of the Baa2 rating is its close alignment with the City of Chicago's general obligation rating (GO) (Ba1 stable) given the close governance linkages between the utility and the city. The water system is a city department and an enterprise fund. The utility is governed by the Mayor and the city council, who have independent authority to establish water rates. While the utility benefits from a very large service area that extends well beyond the city, roughly half of the customers are city taxpayers. The connection to the GO is the primary factor constraining the rating to Baa2 despite otherwise strong attributes of the system, which include strong debt service coverage and steady investment in capital supported by recent rate increases, ample water supply and treatment capacity and role as a provider of essential services.

Risks to bondholders of the strong interrelatedness between the city and its utility is highlighted by the March 26th ruling by the 1st Circuit Court of Appeals. The ruling upheld a lower court ruling that the Commonwealth of Puerto Rico (Ca negative) is not required to pay debt service on "special revenue" bonds of Puerto Rico Highway & Transportation Authority (C negative) during the pendency of the bankruptcy proceedings. There is greater risk for system creditors that the city in the event of serious fiscal stress could impair pledged revenue than if the system were legally independent of the city.

RATING OUTLOOK

The stable outlook mirrors the stable outlook on the City of Chicago's GO bonds given close alignment of the ratings. It also reflects stable system fundamentals, including the expectation that growth in operating costs, due in part to rising pension contributions, will not significantly stress debt service coverage or liquidity in the next several years given recent rate increases.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Separation of management and governance from the City of Chicago

- Upward movement in Chicago's GO rating

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Material leveraging of the open senior lien, which would be contrary to current publicly indicated plans

- Significantly narrowed liquidity and debt service coverage, or growth in leverage of net revenue

- Downward movement in Chicago's GO rating

LEGAL SECURITY

Outstanding water revenue bonds are secured by a second lien on revenue, net of operations and maintenance expenses, of Chicago's water enterprise.

PROFILE

Chicago's water system is a business enterprise of the city. It treats water from Lake Michigan and distributes it to an estimated 5.3 million people both within the city and 125 nearby suburban communities.

METHODOLOGY

The principal methodology used in these ratings was US Municipal Utility Revenue Debt published in October 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Levett
Lead Analyst
Regional PFG Chicago
Moody's Investors Service, Inc.
100 N Riverside Plaza
Suite 2220
Chicago 60606
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Rachel Cortez
Additional Contact
Regional PFG Chicago
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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