CHICAGO - Chicago officials will seek up to $1.1 billion of general obligation borrowing authority from the City Council next week to refinance short-term paper into longer-term, fixed-rate debt.
The move marks the next phase in city efforts to shed much of the $2.2 billion in liquidity risk generated by Moody's Investors Service's May 12 downgrade of Chicago to junk. The city hopes to enter the market in July.
If completed as planned, the city will have just $462 million of remaining liquidity risk, all of it tied to its water and wastewater credits. The liquidity strains created by Moody's downgrade to Ba1 prompted two other rating agencies to dropp Chicago to lower investment grade levels.
Chicago Mayor Rahm Emanuel's administration will submit a substitute ordinance to the City Council Finance Committee Monday, replacing one introduced last month seeking authorization for $300 million of GO debt.
The administration stressed that no new money authorization was being sought and officials said the majority of the refinancing would be aimed at addressing "legacy liabilities."
It's unclear just how much is outstanding under the program that is capped by city ordinance at $1 billion. If approved by the committee, the authorization could be taken up by the full council at its Wednesday meeting.
Morgan Stanley is the lead on the transaction, market sources said.
That information was not confirmed by the city. Morgan Stanley in May entered into an agreement with the city increasing an existing $100 million credit line to $300 million.
"This will clean up their short borrowing program and further reduce their liquidity risks," said one market participant.
The city is only authorized to have a total of $1 billion outstanding under its short term borrowing program, which includes commercial paper and credit lines, although it currently has bank support for a total of $1.1 billion.
Moody's move to junk $8.9 billion of GO, sales tax, and motor fuel bonds and to downgrade the city's sewer and water bonds while keeping them at investment grade pulled termination triggers and default events giving banks the ability, if they chose, to demand repayment of $2.2 billion in debt for bank-supported GO, sales tax, and sewer and water floating-rate paper, swaps, and the short-term borrowing program.
The triggers impacted $800 million of floating-rate GOs and $112 million of sales tax floating-rate paper as well as swaps tied to those deals with a negative valuation of $230 million. The city shed all of that risk over the last two weeks in deals that converted the paper to a fixed rate and by making swap termination payments.
At the time of the downgrade, the city had $600 million of outstanding debt in its short-term borrowing program with default events triggered under its banking agreements. The city disclosed in recent filings that it retained $700 million of borrowing capacity based on bank support. That level was bolstered last month by agreements with JPMorgan Chase for a new $200 million line and Morgan Stanley on the expansion of an existing line to $300 million from $100 million.
Since the downgrade, the city has said it expected to draw from those lines to cover the GO swap terminations for $200 million. The city disclosed in recent offering statements that it intended to draw from a new credit line at least $130 million to complete the conversion of the $800 million in floating-rate GO paper, because the city issued only $670 million of bonds based on available support from its existing property tax levy.
That could bring the outstanding level close to the $1 billion city cap.
Specifically, the city has a $100 million CP line with an expiration or termination of bank support on Sept. 30. A line for $200 million expires Nov. 30, a line for $100 million expires June 30, 2016, another $100 million line expires Sept. 30, 2016, and a $200 million line expires April 25, 2016. The banks include BMO Harris Bank, Bank of America, Morgan Stanley, Barclays, and JPMorgan. All agreed to forbearances staving off a demand for repayment after the downgrades.
"The banks participating in the short term borrowing program have entered into forbearance agreements agreeing not to exercise their respective rights and remedies as a result of such default" until Sept. 30, recent offering documents said. "The city is negotiating with the participating banks for extensions of their respective agreement expiration dates or forbearance periods."
While further chipping away at its liquidity headache and easing some pressures on several of its ratings, the city likely will come in for some criticism for rolling short term debt used to cover operating expenses like legal judgments into long term debt.
The city has tapped its short term borrowing program to cover a $62 million legal settlement tied a dispute over the administration of former Mayor Richard Daley’s approval of a parking new downtown garage in violation of the city and park district’s lease of their downtown parking garages. The short term program also has been tapped to cover repayment of loans tied to the purchase of a former hospital site for Daley’s failed bid for the 2016 Olympics. The city could also fold $180 million into the deal to cancel a 2005 leveraged lease transaction involving a light-rail line that serves Midway Airport. The latest Moody’s default triggered a default on city’s letter of credit reimbursement contract with PNC Bank. The city had previously posted the LOC as collateral, but a previous downgrade by Moody’s in February required the city use reasonable efforts to replace the LOC.
Prior to Moody's latest downgrade, Emanuel said the city plans to reduce the amount of operating expenses rolled over into long-term debt and will phase out over the next four years scoop-and-toss restructurings of debt principal.
If the city completes the latest conversion as anticipated, its remaining liquidity risks would be tied to water and sewer debt, including $110 million on water bonds while the sewer system could face principal repayment of its direct bank loans totaling $332 million within a three to six month period as well as swap termination costs of $25 million.
The city has paid steep yields to borrow of late. It paid spreads to Municipal Market Data's top-rated benchmark of between 145 basis points to 170 basis points on its sales tax issue last week with ratings that ranged from a low of Moody's Ba1 to AAA from Standard Poor's. The city saw steeper penalties a week earlier on its GO remarketing with spreads ranging from 264 basis points to 293.
The city's GOs carry an A-minus rating from Standard & Poor's; the agency lowered the rating two levels and put the rating on CreditWatch with negative implications due to the liquidity strains created by the Moody's downgrade. Fitch Ratings lowered its rating one notch to BBB-plus from A-minus, and placed the credit on negative watch due to the same liquidity problem. Kroll Bond Rating Agency affirmed Chicago at A-minus with a stable outlook.
