Also downgrades senior and second lien water bonds to Baa1 and Baa2 and downgrades senior and second lien sewer bonds to Baa2 and Baa3, affecting $3.8B; outlook negative
New York, May 12, 2015 -- Moody's Investors Service has downgraded to Ba1 from Baa2 the rating on
the City of Chicago, IL's $8.1 billion of outstanding
general obligation (GO) debt; $542 million of outstanding
sales tax revenue debt; and $268 million of outstanding and
authorized motor fuel tax revenue debt.
We have also downgraded the following ratings on debt secured by net revenues
of Chicago's water and sewer enterprises: to Baa1 from A2 on $38
million of outstanding senior lien water revenue bonds; to Baa2 from
A3 on $2.3 billion of outstanding second lien water revenue
bonds; to Baa2 from A3 on $35 million of outstanding senior
lien sewer revenue bonds; and to Baa3 from Baa1 on $1.5
billion of outstanding second lien sewer revenue bonds.
We have also downgraded to Ba2 from Baa3 the rating on $6 million
of outstanding MetraMarket Certificates of Participation (COPs),
Series 2010A, and to Ba3 from Ba1 the rating on $3 million
of outstanding Fullerton/Milwaukee COPs, Series 2011A.
Finally, we have affirmed the Speculative Grade (SG) short term
rating on $112 million of Chicago's outstanding Sales Tax Revenue
Refunding Bonds, Series 2002.
The outlook on all long term ratings remains negative.
SUMMARY RATING RATIONALE
The Ba1 rating on Chicago's GO debt incorporates expected growth in the
city's highly elevated unfunded pension liabilities. Based on the
Illinois Supreme Court's May 8 overturning of the statute that governs
the State of Illinois' (A3 negative) pensions, we believe that the
city's options for curbing growth in its own unfunded pension liabilities
have narrowed considerably. Whether or not the current statutes
that govern Chicago's pension plans stand, we expect the costs of
servicing Chicago's unfunded liabilities will grow, placing significant
strain on the city's financial operations absent commensurate growth in
revenue and/or reductions in other expenditures. The magnitude
of the budget adjustments that will be required of the city are significant.
Furthermore, Chicago's tax base is highly leveraged by the debt
and unfunded pension obligations of the city, as well as those of
overlapping governments. Balanced against the city's many credit
challenges are several attributes, the greatest of which is the
city's broad legal authority to tap into its large and diverse tax base
for increased revenue.
The Ba1 rating on Chicago's sales tax and motor fuel tax debt reflects
the absence of legal segregation of pledged revenue from the general operations
of the city. This lack of separation caps the ratings at the city's
GO rating, despite sound maximum annual debt service (MADS) coverage
provided by pledged revenue.
The Baa1 rating on Chicago's senior lien water revenue bonds reflects
the water enterprise's large and diverse service area that extends well
beyond city boundaries; the Chicago City Council's unlimited rate
setting authority; and sound debt service coverage. These
credit attributes are balanced against challenges including an elevated
debt ratio and the water system's status as an enterprise of the city,
a connection which we believe links the system's credit profile to that
of the city's GO. The Baa2 rating on the city's second lien water
revenue bonds is based on the credit characteristics of the senior lien
water revenue bonds and the subordinate lien pledge of net water system
revenue. The Baa2 rating on Chicago's senior lien sewer revenue
bonds reflects similar credit characteristics as the senior lien water
revenue bonds and also incorporates the sewer system's relatively smaller
service area, the boundaries of which are conterminous with those
of the city. The Baa3 rating on the city's second lien sewer revenue
bonds is based on the credit characteristics of the senior lien sewer
revenue bonds and the subordinate pledge of net sewer system revenue.
The Ba2 rating on the MetraMarket COPs, Series 2010A, reflects
the tax increment financing (TIF) district's moderate equalized assessed
valuations (EAV) and sound debt service coverage provided by pledged revenue.
The Ba3 rating on the Fullerton/Milwaukee COPs, Series 2011A,
reflects the TIF district's small size, negative trend in incremental
EAV growth, and the COPs' subordinate lien on pledged TIF revenue,
which is first used to pay debt service on certain series of the city's
GO debt. The ratings on both series of COPs incorporate the relationship
of the TIFs with the city's GO credit profile.
The SG short term rating on the Sales Tax Revenue Refunding Bonds,
Series 2002, is based on the credit fundamentals inherent in the
city's Ba1 long term sales tax rating and the conditional liquidity support
associated with the bonds.
OUTLOOK
Our negative outlook reflects our expectation that Chicago's credit challenges
will continue, both in the near term and in the long term.
Immediate credit challenges include potential draws on liquidity associated
with rating triggers embedded in the city's letters of credit (LOCs),
standby bond purchase agreement (SBPA), lines of credit, direct
bank loans, and swaps. The current rating actions give the
counterparties of these transactions the option to immediately demand
up to $2.2 billion in accelerated principal and accrued
interest and associated termination fees. Of this amount,
the GO and sales tax revenue rating actions trigger $1.7
billion of potential payments; the second lien water revenue rating
action triggers $99 million of potential payments; and the
second lien sewer revenue rating action triggers $355 million of
potential payments.
The negative outlook also reflects our expectation that Chicago's credit
quality will weaken as unfunded liabilities of the Municipal, Laborer,
Police, and Fire pension plans grow and exert increased pressure
on the city's operating budget. In the near term, Chicago's
administration must comply with a 179% contribution increase to
its Police and Fire pension plans in 2016.
Developments involving the Municipal and Laborer plans present longer
term risks to the city's credit profile. In our opinion,
the Illinois Supreme Court's May 8 ruling raises the risk that the statute
governing Chicago's Municipal and Laborer pension plans will eventually
be overturned. If so, the city's obligation to fund the Municipal
and Laborer plans would likely revert to that which existed before the
statute took effect in January 2015. Under the prior funding requirements,
the city's pension contributions were well below the plans' actuarial
requirements. Therefore, if the Municipal and Laborer statute
is overturned, and no other adjustments are made to plan revenues
and/or expenditures, we believe the plans will continue to extinguish
assets to pay annuitants. As the plans move toward insolvency,
the city's credit standing will continue to deteriorate, given our
view that the state may eventually implement legislation forcing Chicago
to pay annuitants directly. Annuitant payments would materially
exceed current employer contribution levels. In our view,
Chicago's ability and willingness to fund annuitant payments, should
they be required of the city, is uncertain.
WHAT COULD MAKE THE RATINGS GO UP (or revise the outlook to stable)
- City or state actions that halt the growth of the city's unfunded
pension liabilities
- Revenue growth and/or reductions in other operating expenditures
that enable the city to accommodate increased pension costs into annual
operating budgets
- Demonstrated legal separation of pledged revenue from the city's
general operations (sales tax and motor fuel tax ratings)
WHAT COULD MAKE THE RATINGS GO DOWN
- Determination by a court of law that the current statute governing
the city's Municipal and Laborer plans is unconstitutional
- Continued growth in the debt and/or unfunded pension liabilities
of the city and/or overlapping governments
- Narrowing of the city's fund balances and liquidity
OBLIGOR PROFILE
The City of Chicago, with a 2010 US Census population of 2.7
million, is the largest city in the State of Illinois and the third
most populous city in the US. Chicago's water enterprise serves
an estimated population of 5.3 million in northeast Illinois consisting
of residents of the city as well as 125 suburban communities. Chicago's
sewer enterprise serves 2.7 million city residents.
LEGAL SECURITY
Chicago's GO bonds are secured by a pledge to levy a tax unlimited as
to rate and amount to pay debt service. The city's outstanding
CP bank bonds are secured by the city's GO full faith and credit pledge
but do not benefit from a dedicated levy.
Chicago's sales tax revenue bonds are secured by a senior lien pledge
on both receipts of the city's local home rule sales tax revenue and the
city's share of state sales tax collections.
Chicago's motor fuel tax revenue bonds are secured by a senior lien pledge
on 75% of the city's annual allocation of state motor fuel taxes
as well as additional revenues pledged by the city that primarily consist
of dock licensing fees collected from tour boats operating on the Chicago
River.
Chicago's senior lien water revenue bonds are secured by a senior lien
on the net revenue of the city's water enterprise. Chicago's second
lien water revenue bonds are secured by a second lien on the net revenue
of the city's water enterprise. Chicago's senior lien sewer revenue
bonds are secured by a senior lien on the net revenue of the city's sewer
enterprise. Chicago's second lien sewer revenue bonds are secured
by a second lien on the net revenue of the city's sewer enterprise.
The MetraMarket COPs, Series 2010A, and the Fullerton/Milwaukee
COPs, Series 2011A, are secured by a pledge of payments made
by the city on developers' notes to finance redevelopment in the respective
TIF districts. Neither series of COPs is an obligation of the City
of Chicago. The city's payments on the respective development notes
have been assigned to the trustees by the developers as security on the
COPs.
USE OF PROCEEDS
Not applicable.
PRINCIPAL METHODOLOGIES
The principal methodology used in the general obligation rating was US
Local Government General Obligation Debt published in January 2014.
The principal methodology used in the special tax rating was US Public
Finance Special Tax Methodology published in January 2014. The
principal methodology used in the water and sewer revenue debt rating
was US Municipal Utility Revenue Debt published in December 2014.
The methodologies used in the short-term rating were Variable Rate
Instruments Supported by Conditional Liquidity Facilities published in
March 2015 and US Public Finance Special Tax Methodology published in
January 2014. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
The tax increment revenue COPs ratings were reviewed by evaluating factors
believed to be relevant to the credit profile of the issuer such as i)
the business risk and competitive position of the issuer versus others
within its industry or sector, ii) the capital structure and financial
risk of the issuer, iii) the projected performance of the issuer
over the near to intermediate term, iv) the issuer's history of
achieving consistent operating performance and meeting budget or financial
plan goals, v) the nature of the dedicated revenue stream pledged
to the bonds, vi) the debt service coverage provided by such revenue
stream, vii) the legal structure that documents the revenue stream
and the source of payment, and viii) the issuer's management and
governance structure related to payment.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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 rating action on the support provider and in relation to each particular
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.
Matthew C Butler
Asst Vice President - Analyst
Public Finance Group
Moody's Investors Service, Inc.
100 N Riverside Plaza
Suite 2220
Chicago, IL 60606
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Rachel Cortez
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades Chicago, IL to Ba1, affecting $8.9B of GO, sales, and motor fuel tax debt; outlook negative
