CHICAGO — The Chicago City Council yesterday approved up to $2.85 billion of general obligation and airport bonds slated for sale in early 2010 and signed off on a settlement with a neighboring suburb that ends its litigation against the $8 billion expansion of O’Hare International Airport.

The ordinances allow Chicago to issue up to $875 million of new-money and refunding GOs, up to $1.5 billion of new-money and refunding O’Hare general airport revenue bonds, and up to $500 million of Midway Airport revenue refunding bonds. The city expects to sell the GOs and Midway debt in January and the O’Hare bonds later in the first quarter of 2010, finance officials said.

“These bond issuances will provide key financing for infrastructure improvements throughout the city and at O’Hare, as well as achieving interest-cost savings,” the city’s chief financial officer, Gene Saffold, said in a statement.

Chicago has not yet settled on the split between refunding and new money on the O’Hare and GO sales. It is still looking at using the federal stimulus’ taxable Build America Bond program that provides a 35% direct-pay interest subsidy and its $133 million recovery zone economic development bond allocation.

The GO ordinance designates Chicago a federal recovery zone, paving the way for use of the allocation. The city is also examining opportunities to tap its $200 million recovery zone facility bond allocation.

Siebert Brandford Shank & Co. will lead a 100% minority-owned underwriting team on the GO sale. The other members of the syndicate include Loop Capital Markets LLC, Grigsby & Associates, Cabrera Capital Markets LLC, and Estrada Hinojosa & Co.

Fitch Ratings recently revised its outlook on the city’s AA rating to negative. It attributed the action to the size of its budget deficit, the effects of the recession on housing and employment levels in Chicago, and its reliance on one-time measures to help balance the budget. Standard & Poor’s rates Chicago’s GOs AA-minus while Moody’s Investors Service rates them an equivalent Aa3, both with stable outlooks.

The council is expected next month to approve a $6.14 billion budget that closes a $520 million deficit by raiding city reserves for $350 million. The remainder of the deficit is eliminated through spending cuts, job cuts, and cancelling cost-of-living pay increases for non-union employees. About $118 million would be saved through debt restructuring. The budget does not include any new or increased taxes, fees, or fines.

Proceeds of the O’Hare transaction will refund outstanding debt and finance various runway, airfield, capital improvement, and noise-mitigation projects. Bank of America Merrill Lynch is senior manager on the O’Hare transaction

Chicago is currently working on the $3.3 billion first phase of the three-phase $8 billion O’Hare Modernization Program that includes the reconfiguration of existing runways and the construction of new ones. O’Hare has about $4 billion of general airport revenue bonds outstanding in three liens that are rated from the mid- to high single-A range on the third lien to the high double-A range on the first senior lien.

Litigation has driven up the cost of the plan and delayed the city’s acquisition and demolition of some properties, but the council yesterday approved a deal with the suburb of Bensenville that ends litigation filed by the village objecting to the acquisition and demolition of properties and against the expansion project.

The city agreed to various demolition controls, to pay for infrastructure work if needed, and other compensation. Though not in the settlement approved, the city has also agreed to pay the village $16 million for the acquisition of properties.

“This settlement is a significant accomplishment, allowing the city to continue its efforts to improve efficiency and add capacity at O’Hare, as well as the national aviation system,” Department of Aviation commissioner Rosemarie Andolino said in a statement.

The city still faces litigation from the owners of St. Johannes Cemetery, which lies in the path of one of the new planned runways.

The Midway transaction includes the refunding of $150 million of auction-rate securities. City officials did not move to restructure the debt following the collapse of that market in late 2007 and early 2008 because at the time they were working on a long-term lease of the airport. As part of any lease deal, the city would have retired all of Midway’s $1.2 billion of debt.

Chicago was poised this past spring to enter into a $2.52 billion groundbreaking agreement to lease the airport to a private consortium under a federal pilot program that permits the privatization of up to five airports, but it was canceled in April over the group’s inability to raise financing for the 99-year lease transaction.

JPMorgan is senior manager on the Midway deal.

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