CHICAGO – Chicago’s water revenue debt won an upgrade from Standard & Poor’s as the city prepares to shed bank counterparty and liquidity risks in an upcoming issue.
Standard & Poor’s raised the rating by one level, moving the senior lien water bonds to A-plus and second lien bonds to A and assigned a stable outlook. The upcoming sale is being issued under the second lien.
“The upgrade reflects removal of counterparty and liquidity risks in conjunction with the issue of the 2016A bonds and remarketing of the city's series 2000 and 2004 second-lien water revenue bonds,” said Standard & Poor's analyst Scott Garrigan.
The upcoming issue will remarket about $450 million of floating-rate bonds, shifting them to a fixed rate, with new money being issued to cover swap termination payments. The city had previously estimated the negative valuation on the swaps at about $100 million.
The water bonds had been on CreditWatch with developing implications since last May due to the risks tied to defaults on bank contracts associated with the bonds due as a result of credit deterioration. “After closing on both transactions, the city's water system will no longer have any outstanding swaps or variable-rate debt,” S&P said.
The borrowing will allow Chicago to close the door on the $2.2 billion liquidity crisis sparked last spring when downgrades triggered termination events that could have allowed banks to accelerate repayment of existing short-term loans and floating-rate bonds, and demand payments to terminate the associated swaps.
The city last year resolved much of the potential liquidity headache by paying off its short-term lines and converting wastewater, GO, and sales tax bonds to a fixed-rate. It paid $250 million to cancel associated swaps, including $150 million tied to GO paper, $30 million for sales tax debt, and $70 million for sewer.
The city had some breathing room to resolve the water issue as it successfully renegotiated terms and/or obtained waivers to remove the near-term liquidity risks on the water bonds. On three swaps, bond rating threshold triggers were lowered via novation of the swap to a different counterparty or by having the agency that assigned the lowest rating removed.
The current rating reflects the rating agency’s view of the system's strong enterprise risk profile with a large customer base that extends into the suburbs and affordable rates despite a series of increases. Despite the credit’s status as an enterprise system that is separate from the city’s general fund, the credit is not shielded from the city’s pension and budget woes.
“Constraining the rating in the near term are several factors that, in our view, could become longer term constraints to the rating because they are related to the water system's long-term debt profile and the city's overall financial stress,” S&P said.
Fitch Ratings rates $37 million of senior lien water revenue bonds AA-plus and $2.2 billion of second lien bonds AA. It assigns a negative outlook. Moody's Investors Service rates the senior lien water bonds Baa1 and the junior lien Baa2. Kroll Bond Rating Agency rates the second lien AA and stable.
