CHICAGO - Fitch Ratings dropped Chicago's general obligation and sales tax ratings to BBB-plus from A-minus and placed them on Negative Watch over the liquidity risks posed by the city's drop to junk by Moody's Investors Service and its lowering of water and sewer bonds.
"The downgrade reflects increased fiscal pressures on the city following last week's Illinois Supreme Court decision severely limiting the ability to modify pension benefits in the state and a subsequent downgrade of the city's credit to below investment grade," Fitch wrote.
Fitch said it doesn't believe the court decision has a direct effect on the prospects for the city's enacted pension reform as it relies on separate legal arguments that have yet to be decided at the lower court level.
"However, the events of the last week have amplified the city's numerous fiscal challenges and are likely to further limit the city's investor/lender base, resulting in a risk profile that Fitch believes is no longer consistent with a rating in the 'A' category," analysts wrote.
The city could be forced to repay $2.2 billion if demanded by banks based on the Moody's downgrades that also hit the city's water and sewer bonds. Those bonds remain investment grade territory but termination and default events were triggered.
The city hopes to soon shed $800 million of its risk by converting floating-rate debt to a fixed-rate eliminating bank support. "Failure of the city to successfully remarket its variable-rate debt in fixed-rate mode would likely trigger a downgrade," Fitch warned.
The Fitch action impacts $8.1 billion of GO and $546.5 million of sales tax bonds. Another $200 million of commercial paper notes were downgraded to BBB from BBB-plus. At the same time, the ratings were placed on Negative Watch.
Fitch also placed on Rating Watch Negative $38 million in outstanding senior lien water revenue bonds rated AA-plus, $2.2 billion in outstanding second lien water revenue bonds rated AA and $1.4 billion in outstanding second lien sewer revenue bonds rated AA.
Moody's downgrade of the city's water and sewer bonds to ratings between Baa3 and Baa1 also triggered various default and termination events. The city's water system faces swap termination risks of $110 million while the sewer system could face principal repayment of its direct bank loans totaling $332 million within a three to six month period as well as swap termination costs of $25 million, if demanded by banks.
Those costs are part of an overall $2.2 billion in debt the city could be called to repay. The city is in negotiations with its banks in an attempt to negotiate terms or forbearance agreements.
"Fitch believes that the city's plans to deal with these developments are reasonable and manageable, but inherently carry execution risks," analysts wrote. "Failure of the city's efforts could result in a significant rating downgrade."
The Fitch report also highlighted some developments in the city's attempt to deal with its immediate liquidity pressures.
Fitch said: "All lines are now frozen and subject to immediate repayment in accordance with their terms" while the city is in discussions with the banks on possible term changes or a forbearance and possibly restore access.
The city told The Bond Buyer it retained access to its short-term borrowing program that includes commercial paper and lines of credit with a capacity of $900 million.
Fitch also said the city now will make a $70 million swap termination payment tied to its floating-rate conversions with cash on hand, not its credit lines.
Fitch is giving the city some breathing room for the pending legal challenge of pension reforms to its municipal and laborers funds to play out. A hearing in Cook County Circuit Court is set for July. "The outcome of that litigation is still unknown and an adverse decision could cause a further downgrade," analysts warned.
"The city of Chicago's financial crisis is real and has been decades in the making. Today's downgrade by Fitch is the result of heightened pressures on the City's portfolio, prompted by the recent reversal of the Illinois pension reform bill and subsequent downgrades," Chicago's outgoing chief financial officer Lois Scott said in a statement.
