CHICAGO - Chicago takes the first step toward moving $1 billion of short-term, cash flow obligations on to its long-term debt load at a hearing Monday.
The hearing will give Mayor Rahm Emanuel's few council critics a chance to take their shots at the city's longstanding and costly habit, frowned upon by analysts, of rolling short term debt used to pay for immediate needs into long term debt.
Chicago's finance team will defend the general obligation refinancing as needed to repair what the administration has called "legacy" debt problems inherited from former Mayor Richard Daley four years ago and to further resolve a vexing liquidity challenge that continues to threaten its bond ratings. The city has $8.1 billion of long-term GO debt.
The deal Emanuel's administration is planning would allow the city to continue to chip away at the $2.2 billion in liquidity risk generated by Moody's Investors Service's May 12 downgrade of Chicago to junk and its less-severe lowering of city water and sewer bonds.
Call it bad fiscal policy, but the city may have few choices, said several market participants.
"By doing this, they get out from under" the bank contracts now in default and "buy some time to work out better policy, procedures, and legal issues" to shore up city finances, said James Colby, senior municipal strategist at Van Eck Global. With long-term rates still at traditionally low levels, the timing also works in the city's favor.
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 downgrades prompted two other rating agencies to drop Chicago to lower investment grade ratings.
The city hopes to move quickly on the deal with a sale planned in early summer.
Market participants said the city should draw wide appeal as was shown in its $670 million GO sale last month, though there are plenty of uncertainties.
"I think everybody knew this was coming so it's no surprise, but how it does will depend on what's going on in the market with mutual funds" as well as local political developments that impact the city's credit profile, said Lyle Fitterer, head of tax-exempt fixed income at Wells Capital Management.
Fitterer cited the outcome of state budget negotiations, including how the city's interests fare in Springfield, and a potential decision by the Cook County Circuit Court on reforms to two city pension funds as top issues. The court will hear arguments early next month.
"The city will continue to have market access but if the pension case goes in the city's favor, it will see tighter spreads, if not, they will see wider spreads," Fitterer said. The same goes for the state budget impasse.
The city’s finance team, led by new chief financial officer Carole Brown, will outline the borrowing plan for the City Council Finance Committee Monday. The administration stresses that no new money authorization is being sought. In addition to moving short-term debt into a long term, the financing may also include capitalized interest in the initial years and the planned pushing off of some debt principal, providing more budget relief.
If approved by the committee as expected given the strong support Emanuel enjoys in the council, the full council could take up the authorization Wednesday.
Morgan Stanley is the lead on the transaction, market sources said. Morgan Stanley in May entered into an agreement with the city increasing an existing $100 million credit line to $300 million.
The former mayor's nephew, William Daley, is a public finance banker in the Chicago office.
Moody's move to junk $8.9 billion of GO, sales tax, and motor fuel bonds to Ba1 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 $200 million for GO swap terminations.
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 a $1 billion city cap imposed by city ordinance. 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.
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 Daley administration'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.
Prior to Moody's latest downgrade, Emanuel had said the city would reduce the amount of operating expenses rolled over into long-term debt and 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 swaps and bank credit agreements on water and sewer debt.
The city has paid steep yields to borrow with spreads on its GO remarketing last month ranging from 264 basis points to 293 to Municipal Market Data's top-rated benchmark.
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.