CHICAGO – The Chicago City Council signed off Wednesday on Mayor Rahm Emanuel's request to issue up to $200 million of water revenue bonds to cover swap termination payments.
City finance officials previously said the swap termination payments are closer to $100 million but the higher capacity was sought in case the negative termination valuation worsens for the city.
The new money is part of a planned larger deal for up to $700 million that includes the conversion of $455 million of floating-rate water revenue bonds to a fixed rate and the finances the cost of cancelling the attached swaps. Council approval was not needed for the conversion because it's allowed under the original bond documents.
The Finance Committee advanced the borrowing, part of a package of $2.6 billion worth of general obligation, airport, and revenue-backed bond deals, in January. While the other deals were approved, the water authorization was deferred and published at the full council meeting two days later.
At the time, the 11-member progressive caucus questioned the wisdom of moving forward on swap terminations and called on Emanuel to delay or abandon the plan. It takes just two aldermen to vote to delay action through the parliamentary maneuver of deferring and publishing.
The borrowing will allow Chicago to close the door on the $2.2 billion liquidity crisis sparked last spring when downgrades triggered termination events that could have allowed banks to accelerate repayment of existing short-term lines and floating-rate bonds, and demand payments to terminate the associated swaps.
The city last year resolved the potential liquidity headache by paying off its short-term lines and converting wastewater, GO, and sales tax bonds to a fixed-rate. It paid $250 million to cancel associated swaps, including $150 million tied to GO paper, $30 million for sales tax debt, and $70 million for sewer.
Fitch Ratings in a November report outlined how the city successfully renegotiated terms and/or obtained waivers to remove the near-term liquidity risks on the water bonds. On the three swaps, bond rating threshold triggers were lowered via novation of the swap to a different counterparty or having the agency that assigned the lowest rating removed.
Chicago's chief financial officer Carole Brown defended the city's decision to complete the conversion and swap terminations at the January hearing.
"This was a policy that we adopted in the spring," she said, citing praise from rating agencies and investors for the city's decision to shed its floating-rate and swap risks. "We believe it is cheaper and lowers our risk profile."
Some council members and the Chicago Teachers Union have called on the city to take legal action against the banks. The administration said it commissioned an analysis in 2014 by two outside legal firms with regulatory expertise to explore the possibility.
Chicago corporation counsel attorney James McDonald said the report found the city had no legal claim to assert because the "city entered into the swaps knowing the risks" and entered into the contracts because they believed at the time they "made financial sense."
The up to $700 million deal will be led by PNC Capital Markets.
Stifel and Ramirez are co-seniors with Columbia Capital Management and Sycamore Advisors as advisors.
Fitch Ratings rates $37 million of senior lien water revenue bonds AA-plus and $2.2 billion of second lien bonds AA. It assigns a negative outlook. Moody's Investors Service rates the senior lien water bonds Baa1 and the junior lien Baa2. Standard & Poor's rates them A and A-minus, respectively. Kroll Bond Rating Agency rates the second lien AA and stable.
