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Rating Action:

Moody's downgrades Chicago Transit Authority (IL) sales tax revenue bonds to A1; outlook revised to negative

Global Credit Research - 25 Oct 2013

$2.9 billion of sales tax bonds affected; $77 million of lease debt downgraded to A2

New York, October 25, 2013 -- Moody's Investors Service has downgraded the Chicago Transit Authority's $2.9 billion outstanding sales tax revenue bonds to A1 from Aa3 and revised the outlook to negative from stable. Also affected are approximately $77 million of authority lease bonds issued by the Chicago Public Building Commission, which have been downgraded to A2.

SUMMARY RATING RATIONALE

The rating assigned to the Chicago Transit Authority (CTA) sales-tax backed debt has relied partly on active management -- the ability to increase pledged revenue to allow for new debt and to maintain debt-service coverage. Two main factors now indicate weaker CTA credit quality. First, in view of growing credit pressures on Chicago (A3/negative), Cook County (A1/negative), and the State of Illinois (A3/negative), we believe the political will to impose further revenue increases has diminished. Second, the CTA system faces growing deferred maintenance and capital needs that will require funding from new debt issuance and other sources, at a time when state and federal support is likely to dwindle. Despite the recent improvement in pledged revenues driven by the national economic recovery, debt service coverage levels are likely to decrease in coming years. A backlog of pledged state matching payments, though recently reduced, will remain a long-term challenge and may be exacerbated by impending state income tax cuts and the state's massive pension deficits. CTA's own increasing pension challenges may strain its operating budget. Together, these factors have added to the importance of distinctions between CTA's sales-tax bonds and those issued by the Regional Transportation Authority (RTA, Aa3/stable), a transit oversight body with a prior claim on the same regional sales taxes and a more conservative additional debt limit.

STRENGTHS

--Main transit provider in region that has high mass-transit reliance and above-average wealth

--History of support from state and local governments in region served

--Improved coverage of debt service by pledged revenues

CHALLENGES

--Credit deterioration among key municipalities served

--Growing unfunded pension liabilities combined with large capital needs that are likely to require sizeable additional leverage resulting in reduced coverage, and the low likelihood that pledged revenues will be expanded

--State payment backlog that, despite recent improvement, will likely persist

OUTLOOK

The negative outlook reflects our view that increased leverage of pledged sales tax revenues will be needed in coming years to address large capital funding needs, while increases in pledged revenues are unlikely, given the growing fiscal pressures on Chicago area's tax base.

WHAT COULD MAKE THE RATING GO UP

--Sustained trend of improving debt service coverage

--More stringent legal protections for bondholders

--Pledge of new or increased revenues

WHAT COULD MAKE THE RATING GO DOWN

--Tax revenue shortfalls

--Increased leverage (or other factors) leading to a prolonged decline in debt-service coverage ratios

--Legislative or other state government actions that affect revenues available for debt service

--Increasing pension funding shortfall

The principal methodology used in the special tax rating was US Public Finance Special Tax Methodology published in March 2012. The principal methodology used in the lease rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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.

Edward Hampton
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Nicholas E Samuels
VP - Senior Credit Officer
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 Transit Authority (IL) sales tax revenue bonds to A1; outlook revised to negative
No Related Data.

 

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