CHICAGO — The Chicago Transit Authority early next month will restructure about $100 million of its federal capital grant-backed bonds. The agency will avoid principal payments this year and next in order to accelerate capital spending and provide an operating cushion in case fiscal pressures mount.
The action — viewed by rating agencies as a deficit financing and a sign of fiscal stress — will save the CTA $43.5 million in debt-service costs this year and another $41.3 million next year.
This financing allows the CTA to move forward with capital projects that have been delayed, CTA finance chief Karen Walker said in an email. The financing enables CTA to better align the maturity structure of the bonds with the assets financed. JPMorgan is the senior manager.
In addition to freeing up cash for capital projects, it provides some flexibility on the operations side if record-long state matching payment delays continue or grow or CTA sales tax collections falter, according to Moody’s Investors Service.
The authority has $6.8 billion of unfunded capital needs. It expects to receive about $1 billion over the next few years under the $31 billion Illinois capital budget approved last year.
The upcoming deal is divided into two series, a $70 million restructuring of bonds backed by Federal Transit Administration Section 5307 Urbanized Area grants and a $30 million restructuring of bonds backed by Section 5309 Fixed Guideway Modernization grants. The bonds — which are restructuring debt sold in 2004, 2006, and 2008 — will sell the week of May 3.
Under the restructuring, debt service will increase slightly on payments due between 2012 and 2026 and the final maturity of 2026 on the original debt will be extended out to 2028, according to rating agencies. The grants are secured by federal funds and so bondholders and the ratings are insulated somewhat from the action.
But Moody’s, in assigning an A1 rating and stable outlook, expressed a negative view of the move. The rating is up from A2 due to Moody’s ongoing recalibration of municipal debt ratings and does not reflect a shift in credit quality.
The CTA has $860 million of capital-grant backed debt. After the restructuring, maximum annual debt-service coverage will be around three times on the 5309 bonds and 2.2 times on the 5307 bonds.
“Moody’s considers this type of transaction —with deferred principal repayment and extension of final maturities — to be effective deficit financings, and emblematic of fiscal stress,” analysts wrote. “Bondholders are protected from potential worsening stresses at the state, CTA, or Regional Transportation Authority.”
Fitch Ratings affirmed its A rating. Though the bonds are secured solely by federal grants, Fitch took the rare step of assigning a negative outlook based on its view of the CTA’s action.
“Fitch does not normally consider the underlying operations, service levels, or fiscal health of the CTA system in assessing the likelihood that capital grant receipts will continue at levels adequate to service the bonds,” analysts wrote. “However, as part of CTA’s efforts to manage current fiscal strain, it has decided to move approximately $88 million in section 5307 and 5309 principal maturities from 2010/2011 to 2027/2028.”
The CTA said it disagreed with Fitch’s action and stressed the solid coverage of the revenues that secure the bonds.
Standard & Poor’s affirmed its A rating and stable outlook to reflect analysts’ view that the CTA’s future allocation of Section 5307 and 5309 funds will remain consistent with historical trends and that a successor federal reauthorization program will preserve the basic funding structure of the Section 5307 and 5309 programs.
Analysts warned that additional restructurings that push debt-service levels below 1.75 times would likely result in a downgrade. “In our view, additional refundings that result in negative savings and extend maturities would be cause for rating concern,” Standard & Poor’s wrote.
Ratings analysts said the rating is supported by the stability of federal funding, the transit agency’s strategic role in providing services to the Chicago area, and its pre-funding of annual debt service from receipts of grants the previous week.
The CTA operates the second-largest transit system in the country. Total ridership last year was 521.3 million, down about 1% from a year earlier due to the recession and a fare increase.
The credit’s weaknesses include the lack of a debt service reserve and the extension of final maturities to 2028, a term that adds to federal reauthorization risks as it will span three six-year transportation funding reauthorization cycles and is longer than most of the CTA’s peers.
Under the 5307 program, the authority’s apportionment of funds has grown to $145.5 million this year from $39.8 million in 1989. Its 5309 program funds rose to $101.7 million this year from $49.5 million in 1989.
The CTA’s operating budget is supported in part with state matching aid. Its receives those funds through its parent, the RTA. The state — which has a backlog of $4.5 billion of unpaid bills due to a liquidity crisis — is as much as four and half months behind in its transit payments.
The CTA faced a $300 million budget gap going into 2010 due to dwindling sales tax collections and growing labor and debt-service costs. The agency balanced its books through layoffs, budget cuts, and service reductions, as well as by dipping into capital funds that were freed by $180 million in RTA borrowing approved by the state.