CHICAGO --Standard & Poor's hit Chicago with a two-notch downgrade and warned of the possibility for a further drop by placing its ratings on CreditWatch with negative implications due to the liquidity pressures posed by its downgrade to junk by Moody's Investors Services.
Under various banking arrangements, the Moody's downgrade Tuesday gave banks the right to demand $2.2 billion in debt repayments. Standard & Poor's lowered the rating to A-minus from A-plus.
"The rating action reflects our view that city's efforts are challenged by short-term interference that prevents a solid and credible approach at this time," said Standard & Poor's credit analyst Helen Samuelson. "That said, we recognize that the city has a diverse tax base and a management team that has good policies in place."
"These are an important foundation for any city that needs to address the challenges that this city is facing," she added.
Standard & Poor's said it expects the city to address its liquidity pressures -- whether through full re-negotiations or through utilizing its own internal liquidity - during the creditwatch review period. "If the city does need to access its own internal liquidity at levels we feel compromise its overall liquidity strength this could lead to further downgrades," the report issued late Thursday read.
The Moody's downgrade prompted triggers that allow banks who provide credit or serve as interest-rate swap counterparties to demand repayment of $600 million in short-term credit lines, $1.1 billion in floating-rate debt and swaps, and $500 million in sewer or water related floating-rate paper and swaps. No banks have demanded payment and the city is in negotiations on forbearances agreements or to rework terms. Officials say they have the liquidity and reserves to cover the costs if needed.
The city, in the coming month, will eliminate $1.1 billion of the exposure. The city begins next week with the remarketing of two series of GO floating rate bonds totaling $400 million shifting to a fixed-rate to shed bank and swap risks. It will follow the conversions up with another $400 million in the coming weeks as part of a plan to shed some of its bank support and swap risks.
At the lower level, the Standard & Poor’s rating on Chicago’s $8 billion of general obligation debt is four grades above speculative grade.
While Chicago Mayor Rahm Emanuel attacked Moody's downgrade earlier in the week, the administration appeared resigned to its potential impact with the other rating agencies.
"The city of Chicago's financial crisis is real, urgent, and has been decades in the making," chief financial officer Lois Scott said. "The downgrade by Moody's of the city's credit - a decision they say was driven by the Illinois Supreme Court's reversal of the state pension reform bill - has substantially magnified the city's challenges and will add real costs to Chicago's taxpayers."
"Standard & Poor's noted today that their own downgrade is driven by the short-term pressures on the city's fiscal position that were created by Moody's actions earlier this week. However, unlike Moody's, S&P recognizes the City's efforts to not only address its legacy liabilities, but that it has the right tools in place to address the challenges it faces," Scott added.
