CHICAGO Moody’s Investors Service downgraded $10.8 million of certificates of participation issued for a Chicago tax-increment financing district two notches to the lowest investment grade level due to ties to the city’s weakened credit.
The rating was lowered to Baa3 from Baa1 and a negative outlook was assigned on two series of TIF COPs issued for Chicago’s River West and Fullerton/Milwaukee TIF districts.
Principal and interest is secured solely by payments from the city to certain TIF developers pursuant to the terms of redevelopment agreements, or RDAs, between the city and the developers. The city is not under obligation to pay debt service and did not participate in the issuance of the COPs.
“To monetize the city notes, the developers arranged for the issuance of COPs,” Moody’s explained. Principal and interest is based solely on payments made by the city to the trustee under the terms of the RDAs with developers. The trustee is obligated to pay principal and interest on the certificates only with revenues received from the city under the terms of the RDA. Failure of the city to pay under the RDA would not constitute a default on the COPs.
Moody’s placed the rating on review for a downgrade in July. The move was triggered by the rating agency’s triple-notch downgrade of the city’s general obligation rating to A3 with a negative outlook and concerns over a late payment made by the city under the RDA earlier this year.
Moody’s said the downgrade reflects a determination that the weakening of city’s credit quality, as well as that of the Chicago Board of Education, now rated A3 with a negative outlook, has impacted the credit quality of the COPs.
“The rating also incorporates our heightened concerns about the timeliness of the city’s payments to the trustee following a late payment earlier this year,” analysts said, adding that it raises questions over the level of managerial oversight.
The challenges are somewhat offset by decent debt service coverage provided by pledged revenues. The negative outlook on the COPs ratings reflects the negative outlooks on the GO ratings of the city and school district.