CHICAGO — Chicago dodged a downgrade Monday.
Fitch Ratings affirmed the city's BBB-plus general obligation rating, and removed it rating watch negative, saying the city continues to make headway toward easing the potential liquidity crisis prompted by previous downgrades.
The outlook remains negative.
"The removal of the Negative Watch reflects the significant reduction in near-term liquidity risks," Fitch wrote.
The action impacts $8.1 billion of unlimited tax GOs, $546.5 million of sales tax bonds and the city's upcoming $1.1 billion GO sale.
That deal, which will price as soon as next week, includes a $390 million tax-exempt series and a $690 million taxable series. Morgan Stanley is the senior manager.
A big portion of the sale will shift most of the city's short-term credit line debt to the city's long-term debt portfolio, eliminating the risk that banks supporting those lines could accelerate repayment due to default provisions triggered by Moody's Investors Service's May downgrade of Chicago GOs to speculative-grade Ba1.
The downgrades permitted banks to demand repayment of $2.2 billion of debt tied to floating-rate paper, swaps and short-term commercial paper and credit lines. The liquidity threat prompted Fitch Ratings and Standard & Poor's to also lower the city's rating within the investment-grade category.
The city recently reduced the potential liquidity risks by $900 million when it converted floating-rate GO and sales tax bonds to fixed rate, shedding the letters of credit and bank facilities that fell into default after the downgrade.
Once the short-term lines are paid off with the upcoming sale, the city's only remaining liquidity risk is tied to about $460 million of water and sewer related revenue debt.
Much of the roughly $700 million in short-term debt being converted was used to cover operating costs like swap terminations and judgments and debt tapped ahead of a scoop-and-toss restructuring.
The city will use proceeds from its next deal to cover the $180 million cost of cancelling a 2005 leveraged lease transaction involving the Orange Line rapid rail transit to Midway Airport. The Moody's default triggered a default on city's letter of credit on the transaction. The deal also includes capitalized interest for the first two years.
"The city no longer faces the prospect of immediate repayments and/or penalty rates under these agreements. The city appears to have sufficient market access as long as it is willing to pay elevated rates," Fitch wrote.
Solving the liquidity pressures will allow Chicago to shift focus to its 2016 budget set to be released in September. The city is expected to unveil its financial plan to deal with a $550 million spike in its public safety pension payments. The budget also must fund higher payments due under reforms approved to the city's municipal and laborers' funds although those changes are the subject of a legal challenge. The city has $20 billion of unfunded pension obligations.
"The city continues to face credit challenges related to critically-underfunded pension obligations and next year's large required payment increases, for much of which the city has not yet identified funding," Fitch wrote. "The outlook for the city's credit quality cannot be considered stable until such challenges are met in a sustainable fashion."