CHICAGO - The potential liquidity crisis triggered by another rating agency's downgrade to junk was a short term headache Chicago could handle, according to the Kroll Bond Rating Agency.
Kroll stood alone in holding the city's general obligation rating steady after a Moody's Investors Service downgrade last month triggered termination and default events that allowed banks to demand repayment on $2.2 billion of debt if they wanted. Moody's junked the city's general obligation, sales tax, and motor fuel bonds while lowering sewer and water bonds within investment grade territory.
Kroll rates Chicago GOs A-minus with a stable outlook. The potential liquidity crisis prompted Fitch Ratings to lower the city's GOs one level to BBB-plus and Standard & Poor's to drop it two levels to A-minus.
"We didn't see any change in credit quality since our initial rating assessment," Harvey Zachem, a managing director at Kroll, said in a
"We felt it was a short term problem," Zachem said, adding that the rating agency felt the city would resolve the issue through forbearance agreements "since the banks had some assurance of being repaid and had longstanding relationships with the city."
Zachem added that the rating agency felt its position was "validated" by the willingness of two banks to provide additional credit line support. JPMorgan Chase provided a new $200 million line to help cover some costs of the city's conversion of $800 million of floating-rate GO paper to a fixed rate and Morgan Stanley provided an additional $200 million of capacity to its existing line for any use.
The differentials in Chicago's ratings have driven debate in the market. Zachem called a rating a "judgment" based on financial data and said differences should be expected given the varying interpretations of that data.
While Chicago escaped a downgrade for now, its challenges are daunting. "We see the current year as a critical year for the city's credit and there are a lot of moving parts," Zachem said.
"We want to see what type of resolution there will be in the budget," Zachem said. "We want to see some progress in addressing pension funding issues in a fiscally responsible manner and an affordable manner that doesn't limit the city's competitiveness."
