Chicago Transit Authority Revs Downgraded to A1 by Moody's

Moody's Investors Service said it has downgraded the Chicago Transit Authority's $2.9 billion outstanding sales tax revenue bonds to A1 from Aa3 and revised the outlook to negative from stable.

Also affected are approximately $77 million of authority lease bonds issued by the Chicago Public Building Commission, which have been downgraded to A2.

The rating assigned to the Chicago Transit Authority (CTA) sales-tax backed debt has relied partly on active management -- the ability to increase pledged revenue to allow for new debt and to maintain debt-service coverage. Two main factors now indicate weaker CTA credit quality.

First, in view of growing credit pressures on Chicago (A3/negative), Cook County (A1/negative), and the state of Illinois (A3/negative), Moody's believes the political will to impose further revenue increases has diminished. Second, the CTA system faces growing deferred maintenance and capital needs that will require funding from new debt issuance and other sources, at a time when state and federal support is likely to dwindle.

Despite the recent improvement in pledged revenues driven by the national economic recovery, debt service coverage levels are likely to decrease in coming years. A backlog of pledged state matching payments, though recently reduced, will remain a long-term challenge and may be exacerbated by impending state income tax cuts and the state's massive pension deficits.

CTA's own increasing pension challenges may strain its operating budget. Together, these factors have added to the importance of distinctions between CTA's sales-tax bonds and those issued by the Regional Transportation Authority (RTA, Aa3/stable), a transit oversight body with a prior claim on the same regional sales taxes and a more conservative additional debt limit.

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