Moody's Drops Chicago to Baa2

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Rahm Emanuel, mayor of Chicago, speaks at the U.S. - India Economic Opportunities and Synergies Summit in Chicago, Illinois, U.S., on Tuesday, Sept. 20, 2011. The International Monetary Fund cut its India growth forecasts for this year and next because of weak investment and a faltering global economy. Photographer: Tim Boyle/Bloomberg *** Local Caption *** Rahm Emanuel

CHICAGO — Moody's Investors Service delivered a blow to Chicago, downgrading the city one notch to Baa2 and maintaining a negative outlook, citing daunting pension obligations.

The new downgrade triggers termination events on several of the city's swaps, but it retains breathing room on its bank support contracts.

The downgrade impacts $8.38 billion of general obligation debt, $542 million of sales tax bonds, and $268 million of motor fuel bonds. The short-term rating on Chicago's 2002 sales tax revenue refunding bonds was lowered to speculative-grade VMIG-3.

Moody's affirmed the city's water revenue bonds but downgraded its sewer revenue bond ratings to A3 and Baa1.

Moody's has already socked the city, which began 2013 with a Aa3 rating, with a three-notch downgrade and then another downgrade.

"The Baa2 GO rating incorporates expected growth in Chicago's already highly elevated unfunded pension liabilities and continued growth in costs to service those liabilities, even if recent pension reforms proceed and are not overturned in legal appeal," Moody's wrote in the action it posted after midnight Friday.

The city's tax base is significantly leveraged by the direct debt and pension obligations of the city, as well as indirect debt and pension obligations of overlapping governments, Moody's added.

The downgrade triggers a termination event on four of the city's swap contracts. If the counterparties were to act the city would face about $58 million in payments based on recent mark-to-market valuations, according to Moody's.

"The city's available liquidity is more than sufficient to cover these termination costs," read Moody's report. "However, the downgrade also moves the city's credit rating closer to termination triggers included in other interest rate swap agreements."

Chicago is party to 14 interest rate swap agreements tied to its floating rate GO paper and one on floating rate sales tax bonds.

The city has more breathing room on its bank support. Default events are not triggered on all of the city's bank support, letter of credit and other credit agreements until a downgrade by any one rating agency below the Baa3 or BBB-minus level, two notches away from where the city's Moody's rating now stands.

"An event of default on the CP debt and line of credit would provide the lending banks the option to declare all outstanding obligations immediately due and payable," Moody's said. "This could necessitate payments from the city approximating $1.2 billion, per current agreements, if the city's rating falls below Baa3 and the banks demanded immediate collateral."

Mayor Rahm Emanuel's administration issued a statement accusing Moody's of being out of step with the other rating agencies. "In the last 48 hours, both Fitch and S&P have affirmed the City's credit rating, each noting the progress Mayor Emanuel has made in righting the City's fiscal ship after decades of neglect.  We strongly disagree with Moody's decision to reduce the City's credit rating and would note that Moody's has been consistently and substantially out of step with the other rating agencies, ignoring the progress that has been achieved," a statement from the administration read.

The city's GO bonds are rated A-minus by Fitch Ratings and A-plus by Standard & Poor's. Both assign a negative outlook. Standard & Poor's affirmed the rating earlier this week in a report noting that Tuesday's mayoral election results that forced Emanuel into an April 7 runoff could delay a solution on a looming $550 million spike in the city's public safety pension contributions.

Full story to follow.

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