CHICAGO - Chicago will enter the market next week with up to $560 million of fixed-rate, double-A rated second-lien water revenue bonds to fund an ongoing $728 million capital program and refund outstanding debt.

The city, which has long insured nearly all of its general obligation and revenue-backed debt, will take insurance bids, but the decision on whether to go with insurance won't be made until pricing. Given the current credit crunch, the underlying credit will matter more, said several investors.

Standard & Poor's upgraded the senior-lien credit to AA from AA-minus and the subordinate lien to AA-minus last week. Moody's Investors Service changed its outlook to positive from stable on the Aa3 senior lien and the A1 junior lien. Fitch Ratings affirmed its AA-plus and AA, respectively.

"The city is pleased with the strength of our credit, particularly during these challenging economic times," Chicago Finance Department spokeswoman Wendy Abrams said.

The book-running senior manager is UBS Securities LLC, with co-senior managers MR Beal & Co. and Cabrera Capital Markets Inc. The co-managers include Gardner Rich & Co. and Morgan Stanley & Co. Co-bond counsel are Kutak Rock LLP and Sanchez, Daniels & Hoffman, and co-underwriters counsel areMichael Best & Friedrich LLP and Greene and Letts.

The deal is the city's first since it was announced earlier this month that it was among seven issuers suing dozens of firms in two class action lawsuits. However, Chicago last week withdrew from the larger suit that named as defendants UBS and Morgan Stanley. Although city law department officials have not said why, spokeswoman Jennifer Hoyle said the decision was not driven by the city's plans to enter the market with a bond sale underwritten by any of the firms.

The city remains a plaintiff on the lawsuit against Bank of America. The lawsuits, which are seeking to be classified as class action suits, charged that municipal bond issuers had been hurt by alleged widespread price fixing and bid-rigging in the multimillion-dollar municipal derivatives industry since 1992.

Chicago has a total of $273 million of senior-lien water bonds outstanding and $891 million of second-lien water bonds. The bonds are secured by pledge of revenues from the system that provide at least 1.3 times coverage.

The deal is expected to price as soon as Tuesday in a fixed-rate structure with a final maturity in 30 years. About $300 million of the deal will provide new-money proceeds for ongoing capital projects, including purification plant upgrades, conversion of pumping stations to electrical operation, and other improvements.

The remainder will convert outstanding commercial paper to long-term debt and refund outstanding variable bonds issued in 1995, 1997 and 2000 for savings of about $5.5 million. Moody’s said in its report that the city plans to limit variable rate exposure in the program’s debt portfolio to 20% or less. The system has derivative exposure in a floating to fixed-rate swap on $500 million of debt from a 2004 issue.

Standard & Poor's analyst John Kenward attributed the upgrade to the system's strong coverage ratios, its diverse customer base that provides services to 5.3 million customers in Chicago and 125 suburbs, and the expectation of continued strong coverage given the city's plans to increase rates by 15% in the current budget, another 15% next year, and 14% in 2010. Moody's said the positive outlook reflects the increased revenues expected from the rate increases.

The city's challenges include management of a large capital program. Water usage is also dropping as the city has sought to stem the drain on Lake Michigan water under a Great Lakes pact. The city has been moving to convert to a metered system from one that charges a flat rate.

"In wet or dry years, usage fluctuates but overall it is trending downward," Kenward said.

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