CHICAGO – Fitch Ratings lowered Chicago’s motor fuel tax revenue bond rating one level to BBB-plus ahead of the a planned $100 million refunding issue, in a move triggered by the agency’s downgrade of Illinois’ general obligation credit Monday.

Fitch notches the city’s motor fuel credit one level below the state because the bonds are primarily secured by a first lien on the city’s share of motor fuel taxes – assessed at 19 cents per gallon of motor fuel sold as well as a 2.5 cent surcharge on diesel fuel. The city’s share is distributed by the state based on a formula and is subject to an annual appropriation.

Fitch socked Illinois with a downgrade to A-minus and assigned a negative outlook Monday after the General Assembly wrapped up its spring session without action on the state’s pension crisis. Fitch followed late Tuesday by downgrading the motor fuel rating. Its outlook is also negative.

The city is planning a $100 million refunding although a sale date is not yet set and the offering statement has not been published. Loop Capital Markets LLC is senior manager and Cabrera Capital Markets LLC and BMO Capital Markets are co-seniors. The city has $181 million of outstanding motor fuel debt. Chicago has not issued motor fuel tax bonds since 2008.

Moody’s Investors Service also incorporates the state link in its rating. Moody’s downgraded the rating three levels earlier this year to A3 with a negative outlook as it moved to bring the rating in-line with the state, which is rated one notch higher at A2 with a negative outlook.

“The state’s ability to alter pledged revenues presents the risk of non-appropriation, and the rating is therefore notched from the state’s general obligation rating,” Moody’s wrote in affirming the credit.

Standard & Poor’s does not tie the rating to the state’s credit and assigns a high-grade AA-plus and stable outlook to motor fuel bonds.

The city is offering up additional revenue pledges to secure the bonds and is calling the upcoming refunding a motor fuel tax revenue TIFIA bond. The city anticipates a roughly $100 million federal loan under the federal government’s Transportation Infrastructure Finance Innovation Act program. Federal authorities have given the go-ahead for the city to formally apply so a loan is expected. 

The TIFIA program provides loans and loan guarantees for rail lines, marine ports, pipelines, airports, highways, bridges, public transportation systems and other transportation-related projects.

The loan proceeds will help finance the ongoing Wacker Drive reconstruction project which includes an expansion of the downtown riverwalk along the Chicago River. Other additional revenues to be pledged would come from activities slated for the proposed riverwalk such as licensing fees from docks for tour boat operations; outdoor kiosk advertising; naming rights; special events; and concession sales of food, beverages, and other goods and services. The city estimates they would generate at least $2 million during the first year of operations in 2015 and under conservative projections could grow to “provide almost full coverage on the proposed TIFIA loan,” Standard & Poor’s noted.

The city would use the present value annual savings from the refunding “to fund projects on a pay-as-you-go basis,” Chicago’s chief financial officer Lois Scott told city council members earlier this year.

Fitch said its rating assumes support only from the motor fuel tax collections due to the difficulty in assessing the new revenue stream.

Standard & Poor’s holds a similar view but attributes its high-grade rating to strong collections of motor fuel tax revenues from a large, statewide base which provides strong coverage of debt service and the future benefit of added coverage from the new revenue streams.

The credit’s challenges include a gradual but steady decline over the last seven years in motor fuel taxes.

Gross revenues from the tax totaled $1.23 billion in 2011, and declined 1.4% in 2012 to $1.22 billion. Chicago’s piece of the pie is based on its population, relative to all incorporated municipalities in Illinois, so population declines pose a risk. Chicago’s share under the formula was 25% in 2011 and 24.2% -- or $49.4 million -- in 2012.

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