CHICAGO - Chicago is prepping up to $1 billion of borrowing under its wastewater and water credits, which have escaped the battering the city's general obligation bond ratings have endured over its pension strains.
Proceeds will fund work on the aging systems, buoyed by a funding boost from steep rate increases being phased in to support more borrowing and pay-as-you-go financing. The City Council Finance Committee signed off on the borrowing Monday and the full council is expected to vote on the ordinances Wednesday.
The new money will fund "water capital projects across the city including the installation of water mains, facility improvements, and water meter installation," said the city's chief financial officer, Lois Scott. The new money wastewater issuance will finance "sewer capital projects across the city."
Both sales are planned for the third quarter after the city releases its annual financial analysis and preliminary budget in late July and hosts its annual investors' conference.
The ordinances allow up to $575 million of water revenue bonding including $475 million of new money and $100 million of refunding if interest rates allow for sufficient savings.
A separate ordinance permits up to $475 million of sewer revenue bonds to raise $375 million in new money and up to $100 million in refunding bonds for savings. Bonds are backed revenues generated from user fees.
Both deals will cover city borrowing needs for projects over two years in line with the city's recent borrowing practice for both programs, Scott told council members.
PNC Financial Services will be the senior manager on the water deal with BMO Capital Markets and Siebert Brandford & Shank LLC as co-senior managers. A total of 37% of the underwriting team is made up of minority, or women, or disabled veteran firms.
Acacia Financial Group is advising the city.
Bank of America Merrill Lynch will be senior manager on the sewer deal with Mesirow Financial and Ramirez & Co. as co-senior managers. A total of 37% of the underwriting team is made up of minority, or women, or disabled veteran firms.
A.C. Advisory is advising the city.
The city has long focused on rotating firms it deems qualified based on their experience, the strength of the financing ideas, and capital capacity. The finance department also seeks to meet city goals promoting minority and women-owned firms. It also recently began highlighting where the firms are based and how many employees are located in Chicago.
In presenting the financing teams, Scott now also notes the amount of bank credit support and other credit exposure provided by lead managers. It underscores the heightened role such support plays in the city's selection process as it seeks to keep its liquidity costs in check.
PNC has total exposure to the city of $800 million for liquidity and letter of credit support. Bank of America has $380 million in city credit exposure.
"We do begin by looking at the quality of their ideas and their expertise in that field . as well as their credit commitment and community involvement," Scott said. "We balance these different competing priorities in designing a syndicate to bring forward.
"Part of the priority was to make sure we are providing opportunities for the commercial banks that have massive credit commitments to the city," Scott said of co-managers added to the teams.
Scott highlighted Fitch Ratings' affirmation of the credits last week.
Fitch assigns ratings of AA to $1.9 billion of junior water lien bonds and AA-plus to $49 million of senior lien bonds. It rates $1.3 billion of second lien sewer bonds AA. All carry a positive outlook.
"When Fitch looked at our water and sewer bonds they see it as an improving credit," Scott said, noting Fitch's praise of the city's move to increase the ratio of pay-as-you-go financing.
Standard & Poor's currently assigns ratings between AA-minus and AA.
Moody's cut its water and sewer ratings one notch in March, after it dropped Chicago's general obligation rating down to Baa1 citing the city's pension woes. The senior lien bonds are now rated A2 and the second lien bonds A3 with a negative outlook.
The ratings "reflect the interconnectedness of the two enterprises with the city's general operations," Moody's wrote.
Council committee members questioned the minority participation levels and grilled Scott on the racial and gender makeup of the teams working on the deals.
Some also raised concerns over giving the city finance department blanket authority on the level of issuance. Council members have come under fire for allowing debt ordinances in the past to sail through the approval process with few questions.
"I just find it disconcerting that this much authority when we're concerned so much about our bond ratings dropping," said council member John Arena.
Scott sought to differentiate the enterprise credits from the city's GO rating, saying they are judged by rating agencies on differing factors. "Each of them are looked at differently," Scott said.
"They are looking at different security features," she said. "They are doing at different leverage levels."
Scott also noted that to return to seek refunding authority could jeopardize potential savings due to shifts in the market and raise the transaction costs.
The city has been accelerating projects in recent years with a boost in revenue from a series of rate increases. The city is phasing in between 2012 and 2015 a cumulative rate hike of nearly 90% from 2011 levels. Annual inflationary adjustments then begin in 2016.
When Moody's downgraded the systems in March, it cited the potential burden the financially struggling city could place on its fee- and rate-supported enterprise systems.
That was illustrated in Mayor Rahm Emanuel's plan to stabilize two of the city's four pension funds, which passed the state legislature this month but is awaiting Gov. Pat Quinn's decision on whether or not to sign it.
The city would cover about 30% of its increased costs for stabilizing the pension funds by dipping into aviation and water enterprise funds.
The city would allocate the increased costs to those enterprise systems based on their share of employees, instead of relying more heavily on property tax rolls.
"The ratings remain above those of the city's GO due to healthy credit fundamentals and the expectation that any potential increase in the utilities' share of annual pension payments would have a modest impact on the systems' overall financial operations," Moody's said.
In affirming the water ratings, Fitch said: "The scope of the 2012-2015 rate package, with cumulative increases of nearly 90% from 2011 levels, remains a significant credit positive. Audited financial results have improved and are expected to post additional gains over subsequent audit cycles."
Debt service coverage in 2012 rose to 2.1 times from 1.5 times the prior year and is expected to remain above 2 times through 2018.
Other positive features include affordable rates despite the increases, the city's sizeable service area that includes a growing suburban base, and a high-quality water source from Lake Michigan and sufficient amounts to meet long-term demands.
"Currently, it is estimated that system pension costs would increase around 140%-150% to roughly $31 million," Fitch wrote. "While the increased expense is material the jump appears manageable given the system's robust recent financial results."
A potential strain also is continued debt escalation.
"Continued growth in planned system borrowings could offset positive considerations relating to the financial profile," Fitch warned.
On the sewer bonds, total debt service coverage for 2012 rose to 1.6 times from 1.1 times and is expected to remain at or above 1.9 times through at least 2018. Currently, it is estimated that system pension costs would increase around 140%-150% to roughly $12 million.
The system's 2014-2018 water capital improvement program totals $2.3 billion and has risen 14% from last year as the city has accelerated system renewal and replacement plans.
The system's 2014-2018 sewer capital improvement program is $1.6 billion and has risen nearly 30% from last year as the city has accelerated system renewal and replacement plans.