CHICAGO - The Chicago City Council approved without debate Mayor Rahm Emanuel's proposed $1.1 billion general obligation bond restructuring.
"A lot has been said about the condition of the city's finances. This is step that is necessary to refund existing debt to begin to take steps to claw out of the financial condition we're in at the present time," the council's finance committee chairman, Edward Burke, told the full council when he called the ordinance up for a vote Wednesday.
Three council members voted against the financing. Burke abstained as did new alderman Patrick Daley Thompson, a nephew of former Mayor Richard Daley and cousin of the lead banker on the transaction, William R. Daley, a managing director in the Chicago office at Morgan Stanley. The banker is another nephew of the former mayor; his father William M. Daley, served in the administrations of President Obama and Clinton and is a former JPMorgan Chase executive.
The Emanuel administration says the restructuring deal will ease a liquidity crisis that emerged after Moody's Investors Service junked the city's general obligation rating to Ba1 on May 12 and lowered water and sewer bond ratings. It also lays the groundwork for the city to address its $20 billion pension mess, officials said.
The financing, which will include both taxable and tax-exempt bonds, will help shed what the city has sought to portray as mostly "legacy" liabilities inherited from Richard Daley's long tenure and prepare the city and council "for some of the financial choices you are going to be asked to make in the future," chief financial officer Carole Brown said Monday during the committee hearing.
The restructuring cleared the committee Monday after a two-hour hearing. Brown, who left her position as a public finance banker at Barclays to take the position last month, labeled the refinancing debt "clean up" bonds.
The deal allows the city to eliminate the remaining general obligation-related portion of the $2.2 billion liquidity headache created in May by the Moody's downgrades.
The downgrades permitted banks to demand repayment of debt tied to floating-rate paper, swaps, and the city's short-term commercial paper and credit lines. The liquidity threat prompted Fitch Ratings and Standard & Poor's to lower the city's rating within the investment-grade category.
The banks that provide the city with credit lines include BMO Harris Bank, Bank of America, Morgan Stanley, Barclays, and JPMorgan. In addition to Morgan Stanley, BMO Harris is working on the new transaction, one of eight firms serving in the role of a co-manager. The co-seniors are William Blair & Co. and Siebert Brandford Shank & Co.
The city in recent weeks shed more than $900 million of the potential $2.2 billion problem by converting floating-rate GO and sales tax bonds to fixed rate. After the new restructuring, the remaining liquidity risks are tied to $467 million of water and sewer debts.
The city intends to move about $800 million of debt in its short-term borrowing program into a long term, fixed-rate structure, piling it on to a more than $8 billion debt load over a 30-year term, a tactic rarely employed by top-rated credits and recommended against under best-practices guidance.
Debt currently outstanding in the short-term program includes $192 million to cover interest-rate swap termination fees attached to the recent conversion of its floating rate GOs, and another $151 million that went to help complete the conversion.
Other costs the city has covered from the short term program to cover and will fold into long term debt include $62 million to cover a legal judgment tied to the prior administration's violation of the city's parking garage lease. The new Daley alderman's uncle, Michael Daley, represented the private building owner that sued the city.
The city also tapped its short term program to $35 million for loans tied to land purchases made as part of the city's failed bid for the 2016 Olympic Games, other judgments, and $170 million for a "scoop-and toss" refinancing for 2014 budgetary savings by moving principal payments into the future. The city also will cover over a two-year time frame a $75 million retroactive pay raise.
The city also gets budget relief by building $170 million of capitalized interest into the deal for the first two years. It will include $180 million to cancel a 2005 leveraged lease transaction involving the Orange Line rapid rail transit line to Midway Airport. The Moody's default triggered a default on city's letter of credit reimbursement contract with PNC Bank.
Some council members questioned the selection of Morgan Stanley to lead the transaction given the city's much-maligned lease of its parking meter system to a fund managed by Morgan Stanley. Brown noted the city seeks in its underwriting picks to meet minority and women-owned participation levels while recognizing local firms and those banks that provide support. Morgan Stanley gave the city a boost when needed by agreeing last month to increase an existing credit line by $200 million.
The city's GO are rated A-minus rating on CreditWatch with negative implications from Standard & Poor's; a BBB-plus on negative watch from Fitch Ratings; while Kroll Bond Rating Agency affirmed Chicago at A-minus with a stable outlook. The negative watches are due to the liquidity pressures. Moody's rates the city's Ba1 with a negative outlook but will not be asked to rate the transaction.
