CHICAGO – The Illinois Sports Facilities Authority took a four-notch rating blow because of worries that its state debt service appropriation is at risk due to continued state budget gridlock.
S&P Global Ratings dropped the authority's refunding bonds to the lowest investment grade level of BBB-minus from A Thursday, to reflect the risk of state appropriation. The rating agency recently lowered the state's general obligation rating one notch to BBB and assigned a negative outlook.
"The downgrade on the ISFA's bonds reflects our view that the appropriation necessary to fund future year debt service is at risk of becoming a casualty of the protracted budget negotiation impasse," said S&P Global Ratings analyst John Sugden.
The authority's bonds rely on a stream of taxes for repayment but an appropriation in the state budget is required. Amid the ongoing budget impasse, lawmakers eventually signed off on legislation providing the required appropriation in fiscal 2016 and 2017.
"However, given that a budget appropriation will be necessary to fund debt service payments in fiscal 2018 and beyond, we view the credit quality on the bonds to be no higher than that of other appropriation-backed obligations of the state of Illinois," S&P wrote.
The rating agency had previously viewed the appropriation risk as mitigated, basing its earlier rating on the flow of state tax payments and subsidies to ISFA under the rating agency's "special tax bonds" criteria.
"Political dysfunction surrounding the state's budget process could jeopardize ISFA's ability to fund debt service on the sports facility refunding bonds despite strong coverage ratios provided by the pledged revenues," the rating agency said, explaining why it is now applying appropriation criteria.
S&P's negative outlook on the state reflects its view that absent significant measures to achieve structural balance and contain fixed cost growth in the near future, Illinois' practical capacity to improve its finances could greatly diminish.
It also incorporates analysts' concerns that the maintenance of adequate debt-paying capacity is becoming increasingly challenged the longer the political gridlock in Springfield plays out. Lawmakers are expected to return after the November election for a lame-duck session in January to try to settle differences over a budget. The state's bill backlog stands at $9 billion and the deficit at more than $5 billion.
The authority did not respond to a request for comment.
The authority's 2014 $291 million refunding took out the authority's bond sales in 2001, 2003 and 2008 that originally provided financing for the reconstruction of the National Football League's Chicago Bears' home, Soldier Field, and construction of the Chicago White Sox' baseball park.
Fitch Ratings rates the sports facilities bonds BBB and has them on Rating Watch Negative.
The authority's primary revenue stream, which goes to repay the state advance comes from city hotel taxes, which can be volatile. The agency had been under pressure from Mayor Rahm Emmanuel to reduce the chances it will have to tap a Chicago income tax backstop to cover debt service on its Soldier Field renovation bonds as the authority did in 2011 when $185,000 was needed. The refunding's savings provided some breathing room and hotel taxes have since rebounded.
