CHICAGO — Chicago Mayor Rahm Emanuel's administration says it is making headway on relief from $60 million in swap termination payments owed to banks after Moody's Investors Service downgraded its general obligation bonds.
Friday's one-notch downgrade to Baa2 due to mounting pension pressures triggered termination events on four interest-rate swaps that would require roughly $58 million in payments based on recent mark-to-market valuations, according to Moody's.
In response to inquiries, Emanuel's administration reported late Tuesday that the city had renegotiated terms late last week with one counterparty — BMO Harris Bank — allowing it to avoid $20 million in termination fees.
The city's financial team — led by chief financial officer Lois Scott — continues negotiations with Wells Fargo to address a $40 million termination fee.
Administration officials emphasized that they inherited from Emanuel's predecessor Richard Daley the swap portfolio linked to $2.6 billion of floating-rate debt and cited strides toward managing the contracts to ease the potential burden on city coffers as its credit has plummeted.
"Since day one in office, as part of his efforts to right the city's financial ship, the mayor has aggressively taken steps to manage this portfolio, terminating seven swaps totaling more than $1 billion, and renegotiating another 11 swaps valued at $1.25 billion, substantially reducing taxpayer risk resulting from these inherited swaps," a statement said.
The city reported in financial documents last September that a one-notch drop by Moody's would trigger termination events on 10 swap contracts. At the time, Wells Fargo was a counterparty on swaps tied to $200 million of floating rate securities from a 2007 issue and a $193 million issue from 2003. The city also reported then that BMO Harris Bank was a counterparty on swaps tied to $223 million from a 2005 issue.
Both firms are frequent members of the financial teams that underwrite the city's bond deals. The Emanuel administration also has elevated its consideration of the credit support provided by banks as a factor when putting together underwriting syndicates.
The downgrade spurred greater attention on the city's weakened fiscal state and elevated the subject as a campaign subject in the April 7 mayoral runoff between Emanuel and challenger Jesus "Chuy" Garcia.
Garcia charged that it shows the mayor failed to make good on his promise four years ago to put the city's "fiscal house in order."
Emanuel on Tuesday defended his management of city finances, pointing to budgetary strides and legislative approval for reforms to two of the city's four pension funds. He suggested that it would take more time to fix the problems he inherited.
"I've said this from day one .You can't postpone, delay, defer any longer," Emanuel said in comments posted online. "Which is why, both on the budget and on retirement security, we've worked through all of those issues and we have more work to do."
Republican Illinois U.S. Sen. Mark Kirk earlier in the week suggested Emanuel was the best candidate for the job due to the city's precarious fiscal condition, suggesting Emanuel commands the respect of the bond market.
"Rahm's re-election is essential to maintaining the value of Chicago's debt market. We need a strong capable leader I would worry about the value of the Chicago debt if Rahm was not re-elected," Kirk said.
Garcia has sought to ease concerns that he won't be up to the task of solving the city's fiscal woes. He's come under fire for failing to say how he would raise new revenue to address rising pension payments or pay for proposals like the hiring of 1,000 additional police fires.
"When I win, we're inheriting a very challenging situation. I can't make any specific commitments right now. We're trying to wrap our heads around it. We're consulting with the foremost experts in municipal finance and pension questions also. We're doing our homework," he was quoted as saying.
Moody's retained a negative outlook after the downgrade, citing the city's daunting $20 billion unfunded pension tab. The city won reforms to two funds last year but they those changes face a lawsuit; a $550 million spike in its public safety pension contributions looms next year due to a prior state mandate.
Fitch Ratings last week affirmed its A-minus rating and negative outlook. Standard & Poor's affirmed its A-plus rating and negative outlook Friday.
Chicago is party to 14 interest rate swap agreements tied to its floating rate GO paper and one on floating rate sales tax bonds. Another Moody's downgrade would trigger termination events on two GO swaps and a sales tax swap. Recent combined mark-to-market valuation of the three swaps total a negative $39 million. Eight of the city's GO swaps include as termination events a downgrade of the rated security to speculative grade below Baa3, for a negative valuation of $94 million.
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 to speculative grade.