CHICAGO - Cook County, Ill., says a fresh downgrade could force it to refinance $500 million of debt and cost taxpayers an additional $25 million a year.
The cost would come from higher interest rates the nation's second-most-populous county estimates it would pay after converting variable-rate debt to fixed-rate bonds. The restructuring would be an effort to limit the county's bank renewal risk and termination exposure and avoid the situation now facing Chicago, its largest government.
The May 12 Moody's Investors Service downgrade of Chicago to junk triggered events in the city's contracts allowing banks to demand $2.2 billion.
The county's fear of a downgrade comes in wake of Chicago's ratings fall and the county's own struggle to get Illinois lawmakers to support a pension reform bill that would address the large unfunded pension liability that has caused both Moody's and Fitch Ratings to maintain negative outlooks on the county.
"We have regular, constant dialogue with the ratings agencies, two of which have us on negative outlook," said Chief Financial Officer Ivan Samstein. "And they have made it clear that absent structural comprehensive pension reform that's constitutionally sound, there would be additional pressure on our ratings."
The county's bank agreements supporting roughly $625 million of floating-rate bonds would be triggered if the county slid to BBB-minus or Baa3, according to Samstein.
That's five notches below Moody's current rating of A1 and a three notches below Fitch's rating of A-plus. Standard & Poor's rates the county AA with a stable outlook.
Samstein said the county would likely try to shed its variable-rate debt before it got even close to triggering events in its bank contracts.
"We would look to act in advance of actually triggering to reduce the risk of bank renewal exposure," he said. "If our rating goes to A3 or A-minus, we'd look very seriously at fixing out our variable-rate debt to avoid the bank renewal risk."
That would represent a two-notch downgrade from either Moody's or Fitch.
He estimates it would cost an additional $25 million in annual interest costs if the county moved to fixed rate from the current "very low, low" rates it pays on its variable-rate bonds.
The county has more than $3 billion of outstanding general obligation bonds. Fitch, in a 2014 ratings report, calls the county's 13% of unhedged variable-rate debt supported by liquidity facilities "manageable."
The county has $353 million of variable-rate debt that was originally issued in 2002 and 2004 and later refinanced into direct placements with Wells Fargo, Bank of America Merrill Lynch, and JP Morgan. A direct-pay letter of credit from Barclays supports another $130 million of variable-rate bonds.
The county also has $125 million in a tax-exempt revolving fund with PNC Capital.
Samstein said the fiscal pressure facing Chicago isn't directly impacting the county's own finances at this point.
"Chicago is half the county's population and tax base, so what happens to Chicago affects us naturally speaking," he said. "But we're not in the market and not planning to be in the market by the end of the year, so there's no immediate impact."
