Fitch Ratings said it has assigned a BBB-plus rating Chicago, Ill.'s $389.6 million general obligation bonds series 2015A and $689.6 million GO bonds taxable series 2015B.
Fitch also affirms at BBB-plus and removes from Rating Watch Negative Chicago's $8.1 billion unlimited tax GO bonds and $546.5 million (accreted value) sales tax bonds.
Fitch withdraws the following rating as the notes are no longer outstanding and therefore, the bank bond rating is no longer considered to be relevant to the agency's coverage: $200 million (pre-refunding) commercial paper notes, 2002 program series A (tax exempt) and B (taxable) bank bond ratings at BBB.
The rating outlook is negative.
The ULTGO bonds are payable from the city's full faith and credit and its ad valorem tax, without limitation as to rate or amount.
The sales tax bonds have a first lien on the city's 1.25% home rule sales and use tax and the city's local share of state-distributed 6.25% sales and use tax. Additionally, there is a springing debt service reserve, funded over a 12-month period that would be triggered if coverage fell below 2.5x.
The removal of the Negative Watch reflects the significant reduction in near-term liquidity risks. The city recently refunded its variable rate GO and sales tax bonds with fixed rate debt and terminated all associated liquidity support agreements and swaps which were in defaulted status and subject to immediate repayment, due to credit downgrades. The series 2015 bonds will fix out most of the city's short-term borrowing program, the only remaining variable-rate general government debt.
The negative outlook reflects the uncertainty regarding the prospects for sustainable and affordable funding of pensions. The outcome of the legal challenge to the city's pension reform legislation is still unknown and an adverse decision could cause a further downgrade.
The BBB-plus rating recognizes the city's role as an economic hub for the Midwestern region of the United States with a highly educated workforce and improving employment trends. Aside from its pension funding issues, Chicago's financial profile has markedly improved in recent years, although full structural balance remains a challenge. The city's independent legal authority to raise revenues remains a key credit strength.
The sales tax bonds benefit from high historical coverage of maximum annual debt service (MADS) and a very conservative additional bonds test (ABT). The sales tax bond rating is capped by the ULTGO rating as Fitch believes these revenues are not insulated from the city's general credit.
