Chicago's coattails boost rating outlooks of sister issuers
CHICAGO – Chicago’s new stable outlook from Moody’s Investors Service trickled down to its water and sewer credits and the Chicago Park District this week.
After past stings from Moody’s over their links to Chicago’s battered general obligation rating, the three credits saw the positive effects of Moody’s move a week earlier to shift its outlook on Chicago’s Ba1 rating to stable from negative.
Moody’s revised its outlook to stable from negative on the park district and Chicago water and sewer revenue bonds while affirming the existing ratings.
Analysts affirmed the Baa2 and Baa3 ratings assigned to $1.3 billion of senior and second lien water and $1.3 billion of senior and second lien sewer revenue bonds. Most debt is under the second lien.
“The stable outlooks reflect the expectation that growth in operating costs, due in part to rising pension contributions, will not significantly stress debt service coverage or liquidity in the next several years given recent rate increases,” Moody’s wrote. “The outlook also considers the stable outlook on the city of Chicago's general obligation rating.”
Moody’s also affirmed the park district’s speculative grade rating of Ba1 assigned to $320 million of debt.
Chicago – whose general obligation rating along with the parks and Chicago Public Schools were dropped to junk in mid 2015 by Moody’s – stopped asking Moody's for ratings or communicating directly with the rating agencies and its sister agencies followed suit.
The actions reflect Moody’s latest reviews of the various credits. In addition to shifting Chicago’s outlook a week ago, Moody’s upgraded Chicago Public Schools’ rating to B2.
On Friday, Moody's shifted the outlook on $250 million of Ba1-rated city motor fuel tax bonds to stable from negative, a move tied to both the change in the city and state outlook.
Moody’s revised the outlook on the state government’s Baa3 rating to stable from negative Thursday.
“The outlook also assumes that coverage will remain sound,” Moody’s said. The rating is capped at the city’s GO level because of a lack of legal separation of the pledged revenues from the city's general operations and it’s capped at one notch below the state’s rating because the pledged revenues are subject to state appropriation. “These factors constrain the rating at Ba1 despite otherwise strong fundamentals including sound coverage,” Moody’s said.
The water and sewer ratings reflect the systems’ sound financial metrics, sizable and diverse service areas covered, and linkages to the city’s credit quality. Moody’s said it typically rates utility debt within two notches of the municipality’s GO.
“The city's senior lien water rating is three notches above the GO rating given that the water system's service area extends well beyond the city's boundaries,” analysts wrote.
On the downside, the ratings also reflect that the city’s growing revenue needs and overlapping units of government could limit the capacity, both practical and political, to implement considerable rate adjustments if needed.
Chicago is planning the sale of up to $900 million of water and wastewater revenue bond deals before the end of the year. Chicago treats water from Lake Michigan and distributes it to an estimated 5.3 million people in the city and 125 suburban communities.
Chicago's sewer system collects and transmits wastewater within a 230-square-mile area that primarily encompasses the city itself but it does not treat or dispose of wastewater.
The park district’s rating, which is the same as Chicago’s GO, remains one notch below investment grade. Moody’s solely cited the recent change in Chicago’s outlook for the district’s outlook shift.
“CPD's rating reflects the close political and governance relationship the park district maintains with the City of Chicago and the extensive leverage of the district's tax base considering debt and unfunded pension liabilities of overlapping governments,” Moody’s wrote. “CPD benefits from healthy reserve levels and a large and diverse economic base.”
Mayor Rahm Emanuel appoints the district’s board.
Moody’s considers the district’s current pension burden manageable but warns that a recent court ruling that requires the district to refund higher contributions made by employees under a reform package that was voided will worsen the plan’s funding trajectory.
“Reverting to a pay as you go approach would increase the district's annual pension costs substantially,” Moody’s warned. “The stable outlook also assumes that the park district's pension liabilities will be manageable over the next several years.”