Fitch Ratings and Moody’s Investors Service upgraded Chicago’s motor fuel tax-backed credit in conjunction with the city’s sale this week of $61 million of mostly new-money bonds to fund various street improvements.
Fitch upgraded the credit to A-plus from A and Moody’s raised it to A1 from A2. The action affects the current deal — $58.2 million of new-money bonds and a $3.1 million refunding — and $147 million of outstanding debt. Standard & Poor’s rates outstanding revenue bonds AA-plus but has not released a current review.
The bonds carry a first lien on all motor fuel tax revenues collected by the city that can lawfully go to cover debt. About 25% of the city’s share must go to pay for non-arterial residential street improvements. Illinois collects the tax that is set at a rate of 19 cents per gallon. Some funds are held by the state with 54% going to local governments. The tax collections have grown at an average annual clip of 0.4% between 1997 and 2006. Chicago’s total share in 2006 equaled $62.5 million with the portion that can go to debt service providing four times coverage.
“The A-plus rating reflects the consistent history of motor fuel tax collections in the state of Illinois, the strong coverage of annual debt service provided by the city’s allocation, and significant financial flexibility within the program due to the minimal leveraging of funds,” Fitch wrote.
Offsetting factors include the need for a state annual appropriation, the state’s ability to alter distribution levels and the potential impact of economic conditions on tax revenues.
In conjunction with the upcoming sale, Chicago will amend the program’s general bond ordinance, allowing for the option of funding a debt service reserve. The city won’t fund a reserve with the current issue. The amendments also permit the use of interest rate swaps and the use of taxable bonds.
The City Council approved the transaction last fall. Scott Balice Strategies LLC is serving as financial adviser, with Citi serving as the lead manager and Popular Securities Inc. as co-senior manager.