Chicago Credit Downgrade Pushes City Closer To Fiscal Free Fall

March 01, 2015
Chicago

(Recasts; adds sum of financial pressures, criticism from watchdog group, trade of bonds)
By Karen Pierog
CHICAGO, Feb 27 (Reuters) – Chicago drew closer to a mercantile giveaway tumble on Friday with a rating hillside from Moody’s Investors Service that could trigger a evident stop of 4 interest-rate barter agreements, costing a city about $58 million and lifting a awaiting of some-more damaged swaps contracts.
The hillside to Baa2, only dual stairs above junk, and a warning a rating could tumble serve still, means a third-biggest U.S. city could face even aloft costs in a destiny if banks select to cancel other interest-rate hedges opposite fluctuations in seductiveness rates. All told, Chicago binds swaps contracts covering $2.67 billion in debt, according to a avowal late final year.
“This is an hapless wake-up call for anyone still defunct over a mercantile precipice confronting a city of Chicago,” pronounced Laurence Msall, boss of a Chicago-based supervision financial watchdog, The Civic Federation.
Chicago’s finances are already sagging underneath an unfunded grant guilt Moody’s has pegged during $32 billion and that is equal to 8 times a city’s handling revenue. The city has a $300 million constructional necessity in a $3.53 billion handling bill and is compulsory by an Illinois law to boost a 2016 grant to a military and glow grant supports by $550 million.
Cost-saving reforms for a city’s other dual grant funds, that face penury in a matter of years, are being challenged in justice by labor unions and retirees.
State appropriation due Chicago would dump by $210 million between Jul 1 and a finish of 2016 underneath a devise due by Illinois Governor Bruce Rauner.
Given all a financial pressures, both Moody’s and Standard Poor’s, that endorsed a city’s A-plus rating, warned on Friday that Chicago’s credit ratings have room to sink.
Moody’s pronounced Chicago’s rating could be cut if Illinois courts find grant remodel laws enacted to seaside adult a state’s financially bum grant complement and for dual of Chicago’s retirement systems are unconstitutional. A statute by a Illinois Supreme Court on one of a laws could come as early as this spring.
SP warned of a multi-notch hillside if a city fails to come adult with a tolerable devise this year to compensate a sharpening grant contributions.
In a report, Moody’s remarkable that a hillside to Baa2 moves a city closer to stop of 11 some-more swaps deals. Termination on those contracts would potentially cost Chicago an additional $133 million, Moody’s noted.
Chicago has a financial resources during palm to cover a initial $58 million stop payments on a 4 swaps if a city is incompetent to renegotiate terms, Moody’s said.
“The city’s accessible liquidity is some-more than sufficient to cover these stop costs,” Moody’s stated.
If a rating falls next Baa3, Chicago could be forced to compensate about $1.2 billion if banks that produce liquidity comforts like letters of credit for city debt direct evident collateral, Moody’s said.
In an confirmation late final year, a city’s arch financial officer, Lois Scott, concurred that a single-step hillside by possibly Moody’s or SP could trigger about $50 million in evident payments and display a city to variations in seductiveness rates.
A mouthpiece for Chicago Mayor Rahm Emanuel did not immediately respond to a ask for comment.
The hillside and defilement of terms on a swaps agreement expected will turn an emanate in Emanuel’s re-election campaign. The first-term mayor, a former arch of staff to President Barack Obama, unsuccessful on Tuesday to win a infancy of votes in a primary election, and faces a runoff opinion Apr 7 opposite a Cook County commissioner, Jesus “Chuy” Garcia.
Moody’s formed a one-notch hillside inspiring $8.3 billion of ubiquitous requirement binds to Baa2 with a disastrous opinion on a city’s flourishing costs associated to a large unfunded grant liability.
Chicago is fortifying a 2014 Illinois law that increased grant contributions by a city and a workers to dual of a retirement supports and reduced benefits. In a confirmation and in testimony progressing this month in Cook County Circuit Court, Chicago CFO Scott quantified a city’s bearing to a accumulation of credit instruments as a outcome of serve rating downgrades.
Under a three-notch downgrade, Chicago would default on about $2.8 billion of credit facilities, including letters of credit, that a city would expected not be means to replace, according to Scott. Moody’s analysts pronounced many of Chicago’s $806 million of variable-rate GO binds are tied to swaps.
The city, underneath Mayor Rahm Emanuel, has separated hundreds of millions of dollars in risk by terminating or renegotiating 18 seductiveness rate barter or swaption contracts and those efforts are continuing, mouthpiece Libby Langsdorf pronounced final month.
Shawn O’Leary, a comparison investigate researcher during Nuveen Investments, pronounced banks tend to renegotiate terms on barter agreements.
“I would be astounded if a parties direct stop payments,” he said.
Some Chicago debt is trade during worse levels than binds sole by Illinois, that is profitable a biggest produce chastisement among states in a U.S. metropolitan bond marketplace due to a possess mercantile woes.
The widespread on Friday for Chicago binds due in 2019 over a market’s benchmark triple-A scale strike 125 basement points, that is 25 basement points over Illinois’ supposed credit spread, according to Municipal Market Data. (Reporting by Karen Pierog; modifying by Phil Berlowitz, David Greising and Bernard Orr)