Chicago is planning $2 billion of O’Hare International Airport borrowing.

CHICAGO - Chicago plans as much as $3 billion of airport, wastewater revenue, and general obligation borrowing -- mostly for refunding and debt restructuring -- that officials say can't wait on an improved market climate for city debt.

City finance officials defended the timing when Alderman John Arena questioned it during a city council hearing Monday, citing the city's steep borrowing premium on recent bond sales. Yields on Chicago GO bonds jumped dramatically after Moody's Investors Service's downgraded the debt GOs to junk in May.

"Is this the time to be doing these things?," Arena said. "We are most vulnerable and the banks are most predatory." He asked why the city won't wait until the dust settles on Emanuel's four-year plan, announced Tuesday, to cut the city's structural deficit and cover rising police and firefighter pension contributions with a record property tax increase, other taxes and fees, and through savings and other reforms.

Those measures are what "the rating agencies have said you need to do," Arena said during the discussion on the city's planned conversion of floating rate wastewater bonds and swap terminations. "Why not wait until we show the rating agencies that we are doing what we need to do to right the financial ship?"

City debt manager Jeremy Fine replied that with the wastewater and O'Hare deals pricing in October the city does stand to capture some positive market momentum from the 2016 budget proposal. And while the wastewater revenue credit has suffered in the market for ties to the city's credit, O'Hare bonds are more insulated.

"You don't know when the rating agencies will make a positive move," Fine said.

Action is needed soon on the wastewater issue to allow the city to shed bank credit support and swaps now in default due to triggers pulled by the May downgrades. By completing the conversion, the city eliminates any further credit risk, Fine told council members. The cost of credit support has jumped from 50 basis points to 200 to 300 basis points and the field of interested banks has narrowed. The conversion allows for a "more stable and predictable" structure, he said.

The finance committee signed off on the borrowing proposals and the full council is expected to take them up at their next meeting Thursday.

The ordinances authorize up to $2 billion of O'Hare International Airport general airport revenue borrowing, with $1.7 billion of refunding planned and $300 million of new money. The sale would mark the city's largest single bond issue ever.

A second ordinance permits the sale of up to $500 million of GOs, with $225 million to cover debt service payments coming due. The so-called "scoop-and-toss" maneuver provides budget relief this year. The remaining authority would be tapped for refundings with traditional present value savings.

The third ordinance authorizes $225 million of wastewater revenue-backed borrowing. It includes $125 million to terminate swaps now in default although Fine said the cost is closer to $75 million based on current market conditions. The other $100 million authorizes borrowing through the state's clean water revolving fund. Those bonds would be sold by the Illinois Finance Authority which administers the program.

The city also will refinance and convert $330 million of wastewater bonds tied to swaps. The city has authority to convert the bonds to a fixed rate under the original bond indenture so no further council authorization was sought.

GOS

The GO refunding would mark the city's latest round of borrowing for budget relief. The deal would include a mix of tax-exempt and taxable securities. The city has not settled on the timing for the sale. Citi is the senior manager.

The city paid a steep interest rate penalty on its summer GO sale with tax-exempt yields landing between 250 and nearly 300 basis points above Municipal Market Data benchmarks and the taxable tranche 485 basis points over Treasuries.

Chicago carries a Ba1 rating from Moody's, with a negative outlook; BBB-plus ratings from both Fitch Ratings and Standard & Poor's with both assigning negative outlooks; and is rated A-minus rating with a stable outlook by Kroll Bond Rating Agency.

O'HARE

The O'Hare sale is slated for October. JPMorgan and Loop Capital Markets LLC are joint bookrunning senior managers.

The new money will fund the airport's capital improvement program and an ongoing $8 billion capital program to reconfigure O'Hare's runways with negotiations pending on with airlines on remaining pieces.

The refunding will generate $150 million of interest rate savings. "The fact that we can lock in those savings is critical" to help keep O'Hare competitive and cost effective, Fine said.

Moody's recently affirmed the A2 rating on $6.5 billion of senior lien general airport revenue bonds and $663 million of outstanding passenger facility charge debt. The outlook on all $7 billion of debt is stable.

The stable outlook reflects analysts' expectation that passenger level trends will continue to grow in line with national trends and that the remaining portions of the airport's capital plan will be managed without significant cost overruns, both of which will support stable financial metrics.

Moody's also affirmed the Baa1 rating assigned to Chicago O'Hare's $249 million of customer facility charge senior bonds and subordinate $288 million Transportation Infrastructure Finance Innovation Act loan. The outlook is stable.

"While the airport is largely immune from the pension funding issues affecting other city credits, Moody's does expect that steps to remedy pension funding issues will negatively affect long term economic growth, which will likely cause the airport to see weaker origination and destination passenger growth than its international gateway peers," Moody's said in an Aug. 26 report.

Fitch Ratings rates the airport's senior lien general airport revenue bonds A-minus and passenger facility charge revenue bonds A, with stable outlooks. Standard & Poor's rates the airport's GARBs and stand-alone PFCs A-minus.

O'Hare reclaimed the title of world's busiest airport in 2014, a decade after ceding the status to Atlanta's Hartsfield-Jackson Memorial Airport. The status is based on the number of flights which totaled 881,933, down .2% from 2013, compared to Atlanta's 868,359.

WASTEWATER

The wastewater financing will help the city further resolve its liquidity risks tied to downgrades imposed by Moody's Investors Service in May. The city hopes to issue the bonds in October. Ramirez & Co. Inc. is senior manager.

In addition to junking the city's GO credit, the rating agency dropped the city's water and wastewater revenue bonds to lower investment-grade ratings. The actions triggered default events that allowed banks to demand repayment of $2.2 billion of floating-rate paper, swaps, and credit line debt.

The city has resolved the threat to its corporate fund through recent refundings and swap terminations and the new transaction would resolve remaining liquidity issues involving principal repayment on the $332 million of 2008 floating-rate wastewater debt and the swap termination costs.

That leaves only $110 million of potential swap terminations on water debt still to be resolved.

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