CHICAGO — The Metropolitan Pier and Exposition Authority's triple-A Standard & Poor's rating became a victim of the Illinois budget impasse.
With revenues pledged to service the authority's $3 billion of debt trapped by the standoff in the state capitol, S&P downgraded MetPier seven notches to BBB-plus Wednesday.
The action on debt issued for the authority's McCormick Place project expansion bonds, which were also placed on CreditWatch with negative implications, reflects the rating agency's revised view of the credit as one that is subject to state appropriation risk.
That puts the rating one notch below the state's A-minus general obligation rating and CreditWatch placement.
Standard & Poor's previously considered the debt to be in the category of special tax bonds.
The shift in analysts' thinking followed MPEA's filing of a notice earlier this week that it had failed to transfer its monthly $20.8 million of tax revenue to the bond trustee, Amalgamated Bank.
The failure to forward the funds represents a non-payment related technical default. The next debt service payment is due to bondholders Dec. 15.
MPEA's failure to make the payment wasn't due to a lack of funds, but to a lack of the required state appropriation. GOP governor Bruce Rauner and the General Assembly's Democratic majority remain at loggerheads on a spending plan for the fiscal year that began July 1.
"The Illinois legislature did not appropriate the sales tax revenue that is intended to support this monthly payment," Standard & Poor's wrote. "Although the statutory construct and bond document provisions historically have insulated these monthly payments -- and ultimately debt service payments -- from the budget and liquidity pressures occurring at the state level, we now believe this structure is vulnerable to those pressures."
MPEA has sufficient money in other funds -- $44.2 million in its tax fund and $20.8 million in an expansion project fund -- but cannot transfer those revenues without an appropriation in place.
Standard & Poor's said the action on MPEA's credit doesn't impact the state's rating but "underscores the fiscal challenges associated with the protracted budget stalemate."
Legislation passed by the Senate Tuesday would allow the state treasurer to make the transfers necessary to cover the monthly payments and for debt service to be paid until a new budget is adopted and needed appropriations in place, according to Rikeesha Phelon, spokeswoman for Senate President John Cullerton, D-Chicago.
"Although the next bond payment is not due until December 15th, the absence of an appropriation compromises the credit rating of MPEA bonds and reduces sales tax revenue for the state starting with the first required deposit date of July 20," says a summary of the bill.
The House hasn't voted on the measure and Rauner's office declined to comment.
While the legislation would ensure bondholders get paid later this year, it won't impact MPEA's rating given that Standard & Poor's now considers it an appropriation obligation, which limits the rating to one notch below the state.
Several buyside analysts that follow the MPEA credit said they believe applying that methodology more accurately reflects the risk.
"It's an example of why it's hard to trust some public ratings," said one buyside analyst of Standard & Poor's previous view.
Moody's Investors Service already notches the rating off the state's to reflect its appropriation risk, leaving MetPier at Baa1. State sales-tax bonds and civic center bonds also are tied to the state's GO rating.
The project bonds are repaid by the authority's taxes on hotel rooms, restaurant meals, Chicago airport taxicab rides and car rentals, and benefit from a state sales-tax backup pledge subject to appropriation.
The catch for the authority is the flow of funds. Those revenues flow into a project fund and the direct monthly payments require a state appropriation.
Operating revenues from McCormick Place, Navy Pier, the convention hotel, and other authority operations are not pledged.
Late Wednesday, Fitch Ratings delivered its own four-notch downgrade to BBB-plus from AA-minus, citing the same rationale.
"The previous AA-minus rating reflected Fitch Ratings' assessment that the bonds were distanced from the general operating pressures of the state," Fitch analysts wrote.
"This is no longer the case," they wrote. "Therefore, the rating is limited to one notch below the GO rating of the State of Illinois."
Direct state debt continues to be paid under a continuing appropriation.
The depth of the downgrade as it's now linked to the state's rating caught MPEA officials off guard. "We're disheartened by the rating action taken by S&P and surprised by its magnitude. We're continuing to work with the governor and legislature on a solution to the impasse. In the meantime, required funds are being collected and held in the debt service accounts," said the agency's top fiscal officer Richard Oldshue, who was at the state capital Wednesday.
The agency arranged a private loan last year for the construction phase of a new $400 million convention center hotel and said it planned to later pay off the debt with long term expansion project and hotel revenue bonds.