Lois Scott is one of the four founders of Women in Public Finance.
Chicago portrayed the voluntary disclosure as part of a continuing effort led by Chief Financial Officer Lois Scott to improve investor relations.

CHICAGO - Chicago is almost $400 million underwater on 24 swaps tied to $2.4 billion of floating-rate general obligation and revenue-backed paper, the city reports in a new disclosure.

The figures are based on mark-to-market valuations at the close of 2014.

The city reported significant headway in curtailing the risks on its swaps portfolio. It has terminated seven swap or swap options on $1 billion of floating-rate debt and struck more favorable terms on termination triggers on 12 derivatives tied to $1.3 billion of debt since 2011, according to the disclosure report.

The terms of its swaps have posed a headache for Chicago and the wisdom of entering into the deals -- originally struck by the prior administration of Mayor Richard M. Daley -- has come under escalating scrutiny as the city’s credit rating deteriorates. All its swaps have a negative mark-to-market, including several that have amendments adopted by Mayor Rahm Emanuel’s administration.

The update on the city's swap portfolio, letter of credits, direct purchase facilities and line of credit agreements was laid out in a 30-page filing of "additional voluntary disclosure" provided as part of continuing disclosure agreements on city bonds.

Chicago submitted the filing to the Municipal Securities Rulemaking Board's EMMA website Friday as part of its disclosure of its Feb. 27 downgrade by Moody's Investors Service. The rating agency lowered the city's GOs to Baa2 from Baa1 and left a negative outlook on the rating due to rising pressures from a $20 billion unfunded pension liability tab.

"The city is also providing voluntary disclosure of certain other recent events," said the introductory letter from Chicago's chief financial officer Lois Scott. "The city is not obligated to provide further additional updated or supplemental information with respect to the bonds except as otherwise required."

The downgrade initially triggered termination events on four swaps, according to Moody's.

The city has renegotiated terms with BMO Harris Bank on a $66.8 million floating-to-fixed-rate swap that was part of a $223 million 2005 floating rate GO issue. It avoided a $20 million payment based on current valuations. The filing does not report that a termination even was triggered, just that the rating threshold is now at the level under Baa2.

The city reported in the filing that the latest downgrade triggered termination events on three interest rate swap contracts with Wells Fargo Bank with a negative valuation of $38 million.

Wells Fargo has notified the city it reserves its right to designate an early termination date. "The city is in ongoing discussions with Wells Fargo regarding the swaps," the disclosure says.

Two $100 million swaps are tied to a $200 million 2007 sale. They are floating-to-floating rate swaps each negatively valued at $8.7 million. The contracts have an effective date in 2014 due to amendments adopted last year.

The third is a $136 million floating-to-fixed rate swap tied to a $202 million 2003 sale with a negative $20.8 million valuation.

The third is a $136 million floating-to-fixed rate swap tied to a $202 million 2003 sale with a negative $20.8 million valuation.

The third is a $136 million floating-to-fixed rate swap tied to a $202 million 2003 sale with a negative $20.8 million valuation.

The city reported in the new filing that it has posted as collateral a letter of credit issued by PNC Bank in connection with a 2005 sale/leaseback transaction the city entered into in 2005 on the city-owned portion of the Orange Line rail transit route to Midway Airport. The lease deal expires in 2031.

The downgrade requires the city “to use reasonable efforts” to replace the PNC letter of credit with other collateral by March 29. “The city is continuing its discussions with PNC Bank regarding this requirement,” the filing says.

The city portrayed the voluntary disclosure as part of a continuing effort led by Scott to improve investor relations through better disclosure. The city has won praise from investors on that front but investors have also said such outreach is crucial if the city hopes to keep in check its already steep interest rate penalties due to concerns over its solvency.

In addition to the city's GO paper, Moody's also lowered several revenue-backed borrowing programs. The city's senior lien wastewater bonds were knocked down one level to A3 and its second lien to Baa1 while its sales tax and motor fuel bonds carry the same rating as the GOs. Moody's also downgraded the short term rating on floating rate sales tax paper from a 2002 issue to speculative grade.

"Moody's cited the expected growth in the city's unfunded pension liabilities, the city's current long-term debt and the indirect debt and pension obligations of overlapping taxing districts as the reasons for the rating change," the filing tells investors.

The disclosure illustrates the factors that could drive further credit rating deterioration, including an adverse ruling by the Illinois Supreme Court on state-level pension reforms, growth in direct and overlapping debt, and a narrowing of city reserves.

The disclosure provides an update on a legal challenge launched by unions, retirees, and employees against the reforms approved by state lawmakers last year to the city's municipal and laborers' funds. "The city has been defending and will continue to defend this matter vigorously," it reported.

The municipal and laborers' funds were on course to exhaust assets in 2026 and 2029, respectively. If the reforms are eventually voided by the courts, "it is not clear whether or how the unfunded status or insolvency of the two affected pension funds might be resolved or what, if any, impact such a resolution may have on the city," the city's filing says.

The filing also highlights Standard & Poor's affirmation of the city's A-plus rating and negative outlook on Feb. 27 and Fitch Ratings' Feb. 24 affirmation of the city's A-minus rating and negative outlook.

The city reported no impact on its bank support contracts as a result of the latest downgrade.

The city has 26 liquidity support, letter of credits, and direct purchase facilities on more than $2 billion of floating rate bonds from issues between 2002 and 2014 sold under its GO credit, Midway Airport second lien, O'Hare International Airport third lien, water, wastewater, sale tax credit, and tax-increment financing bonds.

The banks include Royal Bank of Canada, Bank of New York, Barclays, Bank of Montreal, Wells Fargo, Citibank, JPMorgan, PNC Bank, US Bank, Northern Trust, Bank of Tokyo and State Street Bank. The rating thresholds for events of default on most are triggered at a rating below the BBB-minus level with the exception of four totaling $372 million. Several require ratings at or below the mid-triple-B level by two rating agencies. Expiration dates range from this year through 2018.

The threshold for an event of default on the PNC support on the Orange Line deal is at a level below BBB-minus. The covenant requiring the city to pursue efforts to replace the LOC was triggered by the Moody's downgrade to the mid-double B level.

Events of default are not triggered on the city's bank support on its GO, Midway, and O'Hare commercial paper program or its GO line of credit until the loss of its investment grade rating by one rating agency.

"If an event of default had been triggered under a liquidity/letter of credit facility, the bank providing such facility would have the right to provide the bond trustee with a notice directing a mandatory tender of the bonds," the city reported.

Under such a scenario, the bond trustee would draw upon the liquidity/LOC facility to fund the purchase price for the bonds. In such case, the bonds would be owned by the bank and would be immediately repayable at the option of the bank.

Should the city's credit ratings slide more, it faces additional swap termination triggers.

"The city intends to continue managing the risks associated with its variable rate debt and swaps by renegotiating or terminating swaps and converting variable rate debt to fixed rate when market opportunities warrant," the disclosure says. The city bears no collateral posting obligations on any of its swaps.

Any termination payments due in the future on the city's revenue bond credits would be drawn from pledged revenue streams.

A default under the city's revolving lines of credit would allow the termination of its credit facilities, requiring the city to immediately pay all outstanding amounts. The city currently has $294 million outstanding under its short term borrowing program which has a capacity of $900 million. An additional draw of $170 million is expected this month.

The disclosure is the most comprehensive update on city fiscal contracts since it revised and expanded its disclosure in an offering statement last September that warned investors of the negative impact further downgrades would have.

The Moody's downgrade impacted $8.38 billion of general obligation debt, $542 million of sales tax bonds, and $268 million of motor fuel bonds, and $1.5 billion of wastewater debt.

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