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Rating Action:

Moody's downgrades to Baa1 the rating on the City of Chicago's (IL) motor fuel tax debt; outlook remains negative

Global Credit Research - 07 Jun 2013

Baa1 rating with negative outlook applies to $271.2 million of rated motor fuel tax debt

New York, June 07, 2013 -- Moody's Investors Service has downgraded to Baa1 from A3 the rating on the City of Chicago's (IL) motor fuel tax debt. The outlook remains negative. The Baa1 rating and negative outlook applies to $271.2 million of motor fuel tax revenue debt, including two series of debt that have not yet been issued: The Motor Fuel Tax Revenue TIFIA Bond (Wacker Drive Reconstruction Project - Including The Chicago Riverwalk Expansion: TIFIA 2013-1004A), which we rated on May 24, 2013, and the Motor Fuel Tax Revenue Refunding Bonds, Series 2013, which we rated on April 16, 2013.

SUMMARY RATING RATIONALE

The downgrade of Chicago's motor fuel tax rating to Baa1 from A3 reflects the recent downgrade of the State of Illinois's general obligation rating to A3 from A2. With legislative approval, the state has the authority to reduce pledged revenues by reducing motor fuel tax rates, increasing appropriations for various state purposes from gross motor fuel tax revenues, or reducing the allocation of remaining motor fuel tax revenues to municipalities. The state's ability to alter pledged revenues presents the risk of non-appropriation. Reflecting this risk, Chicago's motor fuel tax rating is capped at a rating level below the state's general obligation rating. The State of Illinois's general obligation credit profile is most recently discussed in our rating report dated June 6, 2013.

The Baa1 rating on the City of Chicago's motor fuel tax debt also reflects the state's large and diverse economic base from which the pledged motor fuel tax revenues are generated; still sound debt service coverage despite recent declines; an additional bonds test (ABT) that should preclude overleveraging of pledged revenues; a flow of funds that provides for the monthly set aside of pledged revenues with the trustee (Amalgamated Bank); and the conservative structure of the city's motor fuel tax debt, which carries no exposure to the risks associated with variable rate debt or interest rate swaps. These positive credit attributes are balanced against significant pressures, namely steady declines in gross motor fuel tax revenues, which reflect the broader economic downturn, increased fuel prices, and increased use of fuel efficient vehicles, all of which have contributed to a decline in fuel consumption. Another credit challenge stems from the City of Chicago's (general obligation rated Aa3/rating under review for possible downgrade) declining population relative to that of other incorporated Illinois municipalities; this trend factors unfavorably into the statutory formula used to allocate motor fuel tax revenues to Chicago.

The negative outlook on Chicago's motor fuel tax debt reflects the negative outlook on the state's general obligation debt. The outlook also incorporates the steady declines in pledged motor fuel tax revenues and debt service coverage; both trends may continue for the foreseeable future.

STRENGTHS

- Despite recent declines, debt service coverage remains adequate: 2011 and 2012 pledged revenues would provide 2.6 times and 2.5 times maximum annual debt service (MADS) coverage, respectively, on all motor fuel tax debt, including the two series of debt that have not yet been issued.

- The general ordinance that governs the city's motor fuel tax debt establishes a monthly set aside of pledged revenues with the trustee, who receives motor fuel tax revenues directly from the state and additional pledged Riverwalk revenues directly from vendors before passing on any excess to the city.

- Legal provisions include an ABT of 2.0 times, which should preclude overleveraging of pledged revenues.

- All outstanding motor fuel tax bonds are fixed rate and have no exposure to the risks associated with variable rate debt or interest rate swap agreements.

CHALLENGES

- The State of Illinois controls pledged motor fuel tax revenues by establishing motor fuel tax rates, appropriating for various state purposes prior to allocating funds to other units of government, and controlling the formula by which these remaining monies are allocated to Chicago and other municipalities. The state's ongoing budget pressures enhance the risk that motor fuel tax revenues could be diverted for other state purposes.

- Pledged motor fuel tax revenues have steadily declined in each of the past seven years due to decreased fuel consumption and declines in the City of Chicago's population, a trend which factors unfavorably into the allocation formula used to determine the amount of pledged motor fuel tax revenues.

- Legal provisions do not require a debt service reserve (DSR) for the rated motor fuel tax bonds.

- The city's motor fuel tax debt is slowly amortized: inclusive of two series of debt that have not yet been issued, just 15% of the outstanding principal is scheduled to be repaid in ten years.

OUTLOOK

The negative outlook on Chicago's motor fuel tax debt reflects the negative outlook on the state's general obligation debt. The outlook also incorporates the steady declines in pledged motor fuel tax revenues and debt service coverage that may continue for the foreseeable future.

What could change the rating or outlook - UP

- Upward movement in the state's general obligation rating or outlook

- Changes in the provisions governing the city's motor fuel tax debt to effect a legal separation between the pledged revenues and the state's general operations

What could change the rating or outlook - DOWN

- Downward movement of the city's or state's general obligation rating or outlook

- Any delay, reduction, or other impairment in the transfer of pledged motor fuel tax revenues from the state to the trustee

- Further declines in pledged motor fuel tax revenues (caused by increases in the state's competing priority allocations, reductions in fuel consumption, and/or reductions in Chicago's population) that further weaken debt service coverage

- Inability to generate additional pledged Riverwalk revenues in amounts needed to support satisfactory debt service coverage

- Changes in the legal provisions governing the city's motor fuel tax debt that would weaken covenants such as the ABT or the monthly set aside of funds in advance of debt service due dates

RATING METHODOLOGY

The principal methodology used in this rating was US Public Finance Special Tax Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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.

Rachel Cortez
Vice President - Senior 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

Genevieve Nolan
Asst Vice President - Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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Moody's downgrades to Baa1 the rating on the City of Chicago's (IL) motor fuel tax debt; outlook remains negative
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